Restrictive policy cuts labour hoarding more than easing adds
A new European Central Bank working paper finds that monetary policy asymmetrically affects firms' employment decisions, particularly their tendency to hoard labour. Restrictive policy reduces labour hoarding significantly more than accommodative policy increases it.
The asymmetric bite of policy
The study, combining annual firm-level data until 2020 with quarterly data until 2023 and high-frequency monetary policy surprises, demonstrates that monetary policy influences how firms retain staff in response to output changes.
This effect is notably asymmetric: a restrictive monetary policy reduces labour hoarding behaviour by two to three times more than an accommodative policy increases it.
This suggests that tightening cycles have a disproportionately stronger impact on employment adjustment compared to easing.
The research also highlights the role of financing conditions, with financially constrained firms adjusting employment more aggressively when policy tightens, as they are less able to absorb the costs of retaining excess labour.
Beyond aggregate employment numbers
The paper examines the concept of 'labour hoarding,' where firms retain workers even during downturns, anticipating future recovery or fearing rehiring difficulties.
This behaviour has been a striking feature of the post-pandemic euro area economy, explaining employment resilience despite sluggish output growth.
The study shows that monetary policy shapes firms' ability to hoard labour, with financially constrained firms and those with a higher share of low-skill workers reacting more strongly to policy shifts.
This firm-level heterogeneity is crucial for understanding aggregate labour market outcomes and the transmission of monetary policy.
A new lens on policy impact
This study offers a crucial micro-level perspective on monetary policy transmission, highlighting that its effects on employment are far from uniform.
The pronounced asymmetry suggests that tightening cycles could have a disproportionately strong impact on job markets compared to easing.
Policymakers should consider these heterogeneous and asymmetric effects when calibrating future monetary interventions.