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Heterogeneous labor market response to monetary policy: small versus large firms

Author

Listed:
  • Aarti Singh

    (School of Economics, University of Sydney)

  • Jacek Suda

    (Narodowy Bank Polski)

  • Anastasia Zervou

    (Department of Economics, the University of Texas at Austin)

Abstract

We study the heterogeneous effects of monetary policy on the labor market of large and small firms in the United States. We uncover the following facts: (i) Expansionary monetary policy boosts employment and hiring growth in small firms more than in large firms; however, a monetary contraction shrinks small firms’ employment and hiring growth less than in large firms. As a result, monetary policy has a countervailing effect on the employment concentration in large firms. (ii) There is an asymmetry in the effects of monetary contractions versus expansions with respect to firms’ employment and hiring growth. Not accounting for such asymmetry leads to the fallacious conclusion that small firms respond more than large firms to monetary policy shocks. This asymmetry also reveals that contractionary monetary policy shocks have immediate effects on the labor market while the effects of expansionary shocks are slower to manifest.(iii) The response of employment is weaker than that of hiring, highlighting the importance of using labor market flows. (iv) The growth of earnings of new hires decreases similarly across large and small firms in contractions but reacts more for small firms in expansions. We use a heterogeneous firms model with a working capital constraint, an upward-sloping marginal cost curve, and a financial accelerator effect. We augment this model with the wage effect summarized in fact (iv) and demonstrate how the additional wage effect can explain the differential response of the hiring and employment growth of small and large firms of fact (i).

Suggested Citation

  • Aarti Singh & Jacek Suda & Anastasia Zervou, 2023. "Heterogeneous labor market response to monetary policy: small versus large firms," NBP Working Papers 355, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:355
    Note: We thank Saroj Bhattarai, Christoph E. Boehm, James Cloyne, Olivier Coibion, Niklas Kroner, James Morley, Giuseppe Moscarini, Andreas I. Mueller, Ayşegül Şahin, as well as conference and seminar participants at the University of Texas-Austin, Monash University, AEA 2022 (virtual), IAAE (virtual), CEA (virtual), IAAE (London), CRETE (Greece), and the Money Macro Finance Workshop for helpful comments. We also thank Alejandro Justiniano and Arlene Wong for providing their data. Finally, we thank Zhenghao Li for providing excellent research assistance. We are grateful for the fi nancial support of the Visiting Researcher Program from the Narodowy Bank Polski.
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    2. Bobasu, Alina & Repele, Amalia, 2025. "Effects of monetary policy on labor income: the role of the employer," Working Paper Series 3046, European Central Bank.

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    Keywords

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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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