Monetary policy affects labour hoarding asymmetrically
A new Banque de France working paper reveals that monetary policy influences firms' labour hoarding behavior, with restrictive policy reducing it 2-3 times more than accommodative policy increases it. This asymmetric effect shapes employment adjustments over the business cycle.
Hoarding labor, then letting go
The paper examines 'labour hoarding,' where firms retain staff despite softening demand, expecting conditions to improve or fearing rehiring difficulties.
Combining annual firm-level data until 2020 with quarterly data until 2023 and high-frequency monetary policy surprises, the research demonstrates that monetary policy significantly influences firms' willingness to hoard labour for a given change in output.
Crucially, this effect is asymmetric: a restrictive monetary policy reduces labour hoarding behaviour by two to three times more than an accommodative policy increases it.
This finding highlights how central bank actions directly impact firms' employment decisions beyond aggregate demand effects, contributing to the understanding of labour market resilience.
Financing shapes firm responses
Firms do not all respond uniformly to monetary policy shifts.
The study finds that financially constrained firms adjust employment more aggressively when policy tightens, whereas those with stronger balance sheets are better able to smooth employment over time.
Workforce composition also plays a role, with employment in low-skill firms tending to be more sensitive to policy changes.
This research, conducted within the 'Challenges for Monetary Policy Transmission in a Changing World Network' (ChaMP), underscores the importance of firm-level heterogeneity in understanding monetary policy transmission to the labour market.
Beyond aggregate demand
This research provides a crucial micro-level lens on monetary policy's impact, moving beyond traditional aggregate demand channels.
It explains why employment can remain resilient in some downturns but may weaken more sharply during periods of monetary tightening.
For policymakers, this suggests a need for nuanced considerations of financial conditions and firm characteristics when assessing labour market responses.