Monetary Policy, Labor Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers

We document the heterogeneous effects of monetary policy on labor market outcomes via credit channel. Using employee-employer and credit registers in Portugal, we show that falling rates increase wages, hours worked and employment more in financially constrained small and young firms. Consistent with the capital-skill complementarity mechanism, we document an increase in the skill premium and show that financially constrained firms increase both physical and human capital investment the most. We uncover a central role of the credit channel with stronger state-dependent effects during crises. The effects are fully driven by firms with bank credit.