European Central Bank working paper finds monetary tightening reduces investment more at high labour-share firms via borrowing constraints

The European Central Bank published a working paper by Lea Steininger and Anna Matzner examining how monetary policy shocks transmit differently across firms depending on their labour share. Using firm-level evidence, the paper concludes that monetary tightening leads labour-intensive firms to cut fixed-capital investment disproportionately, consistent with a “labour-intensity” transmission channel driven by external financing constraints rather than standard proxies such as firm age, size or leverage. The paper includes a disclaimer that the findings do not represent the views of the ECB. The analysis draws on an Orbis micro-panel of more than 1.3 million listed and unlisted non-financial firms across eight euro area countries over 1999–2017 and identifies exogenous monetary policy shocks using Jarociński and Karadi (2020). Grouping firms by labour-share percentiles, a one standard deviation contractionary shock reduces the tangible asset stock of firms in the highest labour-share bin by 0.6 percentage points more than medium labour-share firms and nearly 1.2 percentage points more than capital-intensive firms three years after the shock, while employment shows no comparable differential response. Complementary results show larger declines for high labour-share firms in long-term debt, profitability (including return on assets), cash flow and market shares, with stronger effects for firms without a reported house bank relationship, supporting bank lending as the key mechanism.