Heterogeneity in labor market response to monetary policy: small versus large firms

Abstract

We study the effects of monetary policy on the labor market in small and large firms in the U.S. We find that a monetary contraction reduces small firms’ employment and hiring growth less than in large firms while a monetary expansion boosts employment and hiring growth in small firms more than in large firms. Disregarding this asymmetry can lead to the erroneous conclusion that small firms respond stronger compared to large firms. We also find that the earnings growth of new hires decreases after monetary contractions and expansions. Incorporating this effect in a standard model can reconcile our empirical results.

Keywords: Heterogeneous firms, financing constraints, labour market, monetary policy

JEL Classification: D22, E24, E52, J23, L25