European Central Bank research finds monetary policy shocks hit employment at young firms harder and drive larger wage shifts at big employers

The European Central Bank published research analysing how firms shape workers’ employment and wage responses to monetary policy shocks, using matched employer-employee administrative data from Germany. The study finds that employment at young firms is particularly sensitive to monetary policy tightening, while wages adjust more at large firms than at small firms, with the large–small wage gap especially pronounced during monetary policy easing. Using panel fixed-effects regressions with macro controls, a surprise 25 basis point tightening is estimated to reduce the probability of remaining employed by 0.17%, with the probability of becoming unemployed significantly higher for workers at firms younger than five years (by 0.05% relative to older firms), while firm size is not a significant driver for employment. On wages, the preferred specification implies a 25 basis point tightening is associated with a 1.7% wage decline for the baseline group (large firms), and wages at small firms fall by 0.63% less than at large firms; firm age is not a key dimension for wage differences, while low-paying firms adjust wages by almost 1% less. Quantile regressions indicate the large–small wage response difference is concentrated among median and above-median earners, and firm-level results suggest the wage heterogeneity reflects different pass-through to wage bills rather than different impacts on investment or turnover.