Firm Level Heterogeneity and the Impact of Monetary Policy on Labour Demand
Working Paper Series no. 1053. Monetary policy asymmetrically affects the response of firms’ employment to an output shock and plays a role in cushioning employment adjustment over the business cycle. Combining annual firm level data until 2020 with quarterly firm-level data until 2023 and high frequency monetary policy surprises, we show that for a given change in output, monetary policy influences the extent to which firms hold on to labour, or “labour hoard”. Furthermore, this effect is asymmetric: a restrictive monetary policy reduces labour hoarding behaviour by 2 to 3 times more than an accommodative policy increases it. Finally, we look at the role of financing conditions and firm demographics.
Employment adjustment after a 10% decline in output
Non-Technical Summary
In recent years, employment in the euro area has remained surprisingly resilient despite weak economic growth and major economic shocks. Rather than laying off workers when demand softened, many firms chose to retain staff, expecting conditions to improve or fearing difficulties in rehiring later. Economists refer to this behaviour as “labour hoarding”.
This paper examines whether monetary policy affects firms’ willingness and ability to hoard labour. Do lower interest rates encourage firms to retain workers during downturns? And does tighter monetary policy lead firms to adjust employment more quickly?
To answer these questions, we combine detailed firm-level data from several euro area countries with information that allows us to identify unexpected changes in monetary policy around ECB announcements. This enables us to analyse how firms adjust employment when output rises or falls, and how these responses vary across different monetary policy environments.
We find that monetary policy plays an important role in shaping firms’ employment decisions. When policy is accommodative, firms are more likely to retain workers despite declines in output. When policy is restrictive, employment adjustments are larger and occur more quickly. As illustrated in the figure below, identical declines in output can lead to different employment outcomes depending on the monetary policy environment. These effects are asymmetric: restrictive policy discourages labour hoarding and accelerates job cuts more strongly than accommodative policy encourages firms to retain workers.
Firms do not all respond in the same way. Financially constrained firms adjust employment more aggressively when policy tightens, while firms with stronger balance sheets are better able to smooth employment over time. Workforce composition also matters: although both high- and low-skill firms respond to monetary policy, employment in low-skill firms tends to be more sensitive to policy changes.
Overall, our findings show that monetary policy influences labour market outcomes not only through its effects on aggregate demand, but also by shaping firms’ ability and willingness to retain workers during difficult periods. This labour-hoarding channel helps explain why employment can remain resilient during some downturns, but also why it may weaken more sharply during episodes of monetary tightening.
Keywords: Labour Hoarding, Monetary Policy Transmission, Firm-Level Heterogeneity, Employment Adjustment, Financial Constraints.
Codes JEL : E52, J23, E32.
Updated on the 17th of July 2026