Credit Supply, Firms, and Earnings Inequality

We study the distributional consequences of monetary policy-induced credit supply in the German labor market.Firms in relationships with banks that are more exposed to the introduction of negative interest rates in 2014 experience a relative contraction in credit supply, associated with lower average wages.Within firms, initially lower-paid workers are more likely to leave employment, while initially higher-paid workers see a relative decline in wages.Between firms, wages fall by more at initially higher-paying employers.Our results suggest that credit affects the distribution of wages and employment both within and between firms.