Effects of monetary policy on labor income: the role of the employer

Alina Bobasu and Amalia Repele

No 3046, Working Paper Series from European Central Bank

Abstract: This paper investigates the role of firms in the transmission of monetary policy to individual labor market outcomes, both the intensive and extensive margins. Using German matched employer-employee administrative data, we study the effects of monetary policy shocks on individual employment and labor income conditioning on the firm characteristics. First, we find that the employment of workers in young firms are especially sensitive to monetary policy shocks. Second, wages of workers in large firms react relatively more, with some pronounced asymmetries: differences between large and small firms are more evident during monetary policy easing. The differential wage response is driven by above-median workers and cannot be fully explained by a worker component. Notably, larger firms adjust wages more significantly despite experiencing similar changes in investment and turnover compared to smaller firms. Furthermore, monetary policy tightening disproportionately impacts low-skilled and low-wage earners, while easings amplify inequality due to substantial wage increases for top earners. Overall, the effect of monetary policy on inequalities is however larger in easing periods – driven by a large increase in wages for top earners. JEL Classification: E24, E52, E58

Keywords: employment; labor market; monetary policy; workers type (search for similar items in EconPapers)
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253046

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