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The Employment Concentration Channel of Monetary Policy

Working paper 859
Working Papers
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Gepubliceerd: 20 april 2026

Door: Guido Ascari Andrea Colciago Marco Membretti

Under monetary tightenings, employment at small, high-churn firms con-tracts more than at large incumbents, raising the employment share of large firms. A mixed-frequency BVAR on U.S. data (1983–2018) shows that tight-enings reduce firm entry and new-entrant hiring, severing inflows into small firms, while higher exit destroys small-firm employment. Large incumbents are comparatively insulated, rarely exiting and exhibiting weak sensitivity to entry conditions. This mechanism raises employment concentration, defining an em-ployment concentration channel of monetary policy. An estimated structural model with heterogeneous firms, endogenous entry and exit, and equilibrium unemployment matches this effect, showing that the concentration channel is quantitatively important in accounting for the empirical output-inflation trade-off.

Keywords: Monetary policy; employment concentration; unemployment; heterogeneous firms; BVAR.
JEL codes E52; E32; C13.

Working paper no. 859

859 - The Employment Concentration Channel of Monetary Policy

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Research Highlights:
  • Monetary tightening reshapes employment composition, disproportionately shrinking employment at small, high-churn firms relative to large incumbents.
  • ·We identify an employment concentration channel of monetary policy using mixed-frequency BVAR evidence from U.S. firm-level data.
  • Tightening suppresses firm entry and accelerates small-firm exit, persistently raising large firms’ employment share.
  • A heterogeneous-firm model with endogenous entry and exit quantitatively matches observed employment concentration and inflation–output dynamics.
  • Monetary policy trade-offs are endogenous to firm composition; rising employment concentration alters disinflation costs over time.

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