The European Central Bank published a working paper finding that firms immediately reduce employment expectations after a contractionary monetary policy surprise and that the effect persists for about a year. A 25 basis point target rate surprise worsens the net balance of hiring intentions by about 13 percentage points on impact, with the effect peaking after one month. Firms initially scale back hiring, while planned layoffs become more important later, and firm-level employment growth declines within a year. The analysis combines high-frequency monetary policy surprises with monthly survey data covering about 9,000 German firms from 2005 to 2024. Production expectations are about twice as likely to adjust initially but return to normal within roughly six months, indicating greater rigidity in employment decisions. Financially constrained firms, those with restricted credit access and those affected by the minimum wage revise employment plans more strongly, while greater collective bargaining coverage moderates the response.
European Central Bank2026-08-10
European Central Bank working paper finds monetary tightening quickly and persistently lowers German firms’ employment plans
A European Central Bank working paper finds that contractionary monetary policy surprises cause German firms to cut employment plans immediately, with the effect lasting about a year and feeding into lower employment growth. Financial constraints and minimum-wage exposure amplify the response, while collective bargaining coverage moderates it.