Heterogeneous Labor Market Response to Monetary Policy: Small Versus Large Firms

Speaker: Prof Aarti Singh 

Affiliation: University of Sydney

Location: Room S402 - Social Sciences Building (#24), UQ St Lucia Campus.

Abstract

We study the heterogeneous effects of monetary policy on the labor market of large and small firms in the United States. Our results are: (i) Expansionary monetary policy boosts employment and hiring growth in small firms more than in large firms; however, a monetary contraction shrinks small firms’ employment and hiring growth less than in large firms. (ii) There is an asymmetry in the effects of monetary contractions versus expansions with respect to firms’ employment and hiring growth. Not accounting for such asymmetry leads one to conclude that small firms respond more than large firms to monetary policy shocks. This asymmetry also reveals that contractionary monetary policy shocks have immediate effects on the labor market while the effects of expansionary shocks are slower to manifest. (iii) The employment response is weaker than that of hiring, highlighting the importance of using labor market flows. (iv) The growth of the average earnings of new hires decreases in both monetary contractions and expansions. We use a heterogeneous firms model with a working capital constraint, an upward-sloping marginal cost curve, and a financial accelerator effect. We augment this model with the employees’ earnings effect and demonstrate how this additional effect can explain the differential response of the hiring and employment growth of small and large firms.

About the presenter's meeting

If you would like to meet with Prof Singh, contact Prof Begoña Dominguez