Caught in the Storm? Financial Conditions and Employment Decline in German Manufacturing Industry

Since 2022, manufacturing employment in Germany has declined markedly, even as overall employment remained stable. This paper examines whether tighter financial conditions contributed to this development. Using pre-pandemic sectoral leverage as a measure of financial exposure, we show that highly leveraged manufacturing sectors experienced significantly larger employment declines following the sharp increase in euro area interest rates. The decline is particularly high for capital intensive manufacturing sectors and robust to controls for energy intensity and preexisting trends. The findings suggest that financial leverage amplified the impact of monetary tightening on manufacturing employment.

Joint work with Enzo Weber.

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