Monetary Policy And Labour Supply In The Euro Area

This paper explores how monetary policy affects labour supply in the euro area, challenging the conventional view that monetary policy operates solely through labour demand. Building on recent evidence from the US, we provide the first systematic analysis of heterogeneous labour supply responses to monetary policy in the euro area. We construct a novel dataset of monthly labour market stocks and flows using the EU-SILC survey from 2010 to 2019, exploiting its unique ability to stratify individuals by income. We first validate our newly constructed monthly series against the quarterly labour market transitions published by Eurostat through the labour force survey. Focusing on transitions between inactivity and unemployment—flows typically driven by labour supply decisions—we then estimate their response to both conventional and unconventional monetary policy shocks identified via highfrequency movements in interest rates around ECB announcements. Our results show that tighter monetary policy is associated with an increase in the likelihood of transitions from inactivity to unemployment and reduces the likelihood of the reverse, consistent with an income effect on labour supply. However, we find no clear trend across income groups and uncover substantial heterogeneity across countries, highlighting the importance of accounting for national differences in euro area labour market responses.