Oil Price Shocks Hit Low-Income Workers Hardest

Economists have long known that disruptions to oil supply tend to push inflation up and economic activity down. Research has also shown that low-income households are more exposed through their spending, since energy makes up a larger share of what they buy. The recent research by Kurt Mitman and co-authors shows that low-income workers not only face higher costs when oil prices rise, they are additionally hurt by oil-price shocks on the income side, experiencing sharply worse outcomes in the labor market.

Using 45 years of German administrative records—covering nearly 200 million person-month observations—the authors find that a 10 percent rise in oil prices reduces earnings growth for workers at the bottom of the income distribution by roughly two percentage points within two years, while high-income workers are largely unaffected. The chances of finding a job also fall sharply for low-income workers, declining by four percentage points for workers in the bottom fifth of the income distribution.

The study further reveals that oil supply shocks and interest rate increases by central banks affect low-income workers in different ways. Oil shocks directly erode earnings and make it harder to find a job, whereas higher interest rates mainly lead to more people losing their jobs. This difference matters for how policymakers should respond to sudden increases in energy prices.

For many years, economists have debated whether the recessions that follow oil price increases are caused by the oil shocks themselves, or by the tighter monetary policy that central banks often adopt to fight the resulting inflation. The authors bring new evidence to this question using two different ways of estimating what would have happened if central banks had not raised interest rates. They find that the answer depends on how the comparison is made, but in both cases the unequal effects across workers are mostly driven by the oil shock itself rather than by the monetary policy response. This means central banks have limited ability to protect low-income workers through interest rate policy alone.

The findings suggest that targeted fiscal policies or structural measures may be needed to protect vulnerable workers when oil prices rise. Monetary policy, while important, is a blunt tool and cannot easily address the strongly unequal effects of supply disruptions.

The paper has been published in IMF Economic Review and is available at:

https://doi.org/10.1057/s41308-025-00291-0