The war in Iran has sent oil prices sharply higher, reviving the question of who bears the cost of energy shocks and how central banks should respond. Using nearly half a century of German data, this column shows that oil supply shocks disproportionately impact low earners, reducing their labour income and their chances of finding and keeping a job. The central bank’s moderate response to past oil shocks added little to this real damage, even as it held down inflation. With energy-driven inflation back on the agenda, the results caution against a return to the wait-and-see approach that proved costly in 2021-22.
Since the beginning of the Iran war in February 2026, the world economy has experienced a sharp surge in the price of oil that reached almost 120$ per barrel in March. Although prices have since given back much of that increase amid hopes of a lasting ceasefire, they remain well above their pre-war level, and the question of how forcefully central banks should respond to the inflationary impulse is once again live.
While the recent oil price shock was unusually large, it follows a decade of volatile commodity markets marked by the COVID-19 pandemic and Russia’s invasion of Ukraine. This surge in commodity price volatility has put the study of effects of supply-side shocks at the top of macroeconomists’ to-do lists. And we have indeed seen much progress in identifying the effects of, in particular, oil shocks on inflation and output (Känzig 2021, Kilian 2024). Moreover, a rapid response to the current episode has already begun to quantify its inflationary fallout (Kilian et al. 2026) and to show why geopolitically driven oil shocks bite harder than ordinary ones (Verduzco-Bustos and Zanetti 2026). Beyond the observed effects of supply shocks on the macroeconomy, however, policymakers may also be interested in two additional features of their transmission. The first is their redistributive effects, which may be particularly important for welfare consequences. The second is the role of economic policies. In fact, the observed transmission of supply-side shocks strongly depends on any accompanying policy response: while temporary income support or gasoline tax reductions may dampen any slump in consumption and aggregate demand after an oil price surge, a contraction in monetary policy to contain its inflationary consequences may amplify it. For historic data to inform the design of sensible policy responses to current or future supply shocks, we need to be able to separate the damage done by past shocks themselves from the effects of historical policy responses.
In two recent papers (Broer et al., 2025, 2026) we study how oil supply and monetary policy shocks affect workers at different points in the earnings distribution, and how the central bank’s reaction to oil shocks matters for that transmission. We focus on a particularly important commodity – oil – and leverage nearly half a century of granular data from the German Social Security Administration, with detailed information about individual workers’ employment and earnings histories.
The identification of oil supply shocks is challenging, as observed fluctuations in quantities and prices partly reflect demand fluctuations. We follow Känzig (2021) and use supply-related news in announcements by OPEC, the group of major oil exporters, as a source of price movements that are plausibly unrelated to current demand. This provides a sufficient number of exogenous oil-price movements to estimate their effect by standard time-series techniques. In short, following Jordà (2005), we trace out how earnings and employment respond over the months following the shock, leaving the technical details to the paper.
We first show how supply-driven increases in oil prices significantly raised inflation and reduced aggregate activity in the German economy, in line with the textbook view of supply shocks. Importantly, monetary policy responded to oil price increases on average through only a moderate tightening, followed by slightly looser policy in later periods.
Figure 1 Earnings and employment effects of oil shocks across the income distribution
In terms of labour market consequences, our analysis reveals significant and persistent negative effects of oil price increases on employment stability, job-finding probabilities, and earnings of German workers. Panel a) of Figure 1 shows the slow but substantial fall in average earnings in our sample of German workers. Importantly, the contractionary effect on the labour market disproportionately harmed workers at the lower end of the income distribution: panel b) shows that, at a horizon of 24 months, the negative earnings effect of oil shocks decreases in magnitude along the whole income distribution, reducing earnings by about two percentage points at the bottom, but only negligibly at the top.
Panel c) of Figure 1 shows that the decline in earnings at the bottom of the distribution is partly due to a stronger likelihood of non-employment there: when we estimate the effect of oil shocks on the likelihood of employment for those individuals that are currently employed, we find again stronger effects at the bottom of the income distribution (although the differences are less significant). And panel d) shows that this heterogeneous labour market effect is even stronger for job-finding probabilities, which decline by about 4 percentage points for the income poor, but again only negligibly for the rich.
Since the beginning of the Iran war, its inflationary consequences through higher commodity prices have featured strongly in central bank communication. Indeed, the economic consequences of commodity price surges may depend crucially on whether monetary policymakers ‘see through’ their inflationary effects in the short run or take a more hawkish stance. We find that, on average, the ECB responded only moderately to negative oil supply news and its inflationary consequences, raising interest rates initially before lowering them. How much did this monetary policy reaction contribute to the observed consequences of oil shocks? To answer this, we build on our estimates of how monetary-policy surprises affect earnings and employment along the German income distribution (Broer et al. 2026), and construct two counterfactual scenarios in which the central bank does not lean against the oil shock. In the first, policymakers surprise the economy each period by holding interest rates steady (as in Sims and Zha 2006). In the second, which is less vulnerable to the Lucas critique (Lucas 1976), we combine the estimated responses to monetary-policy shocks from the Bundesbank and ECB periods into a single package that, hitting alongside the oil shock, keeps the policy rate roughly unchanged without the need for repeated surprises (as in McKay and Wolf 2023).
Reflecting our estimates of a moderate policy response, both methodologies find that the contractionary policy reaction plays only a small role for the economic consequences of oil supply shocks. An exception is inflation, which is more strongly affected by monetary policy, and thus 20-30 basis points higher in the medium term without a monetary reaction.
Our results suggest that the rise in commodity prices following the Iran war is bad news for workers, but much more so at the bottom of the income distribution where falls in earnings and employment probabilities are concentrated. While ECB policymakers can indeed sustain the economy by reacting only moderately, they should not over-learn the lesson: the inflation surge of 2021-22 clearly showed the dangers of a wait-and-see approach to inflation. Importantly, any surge in inflation may have a disproportionate effect on the poor beyond the labour market effects that we focus on, as the assets of low-income households are often not inflation proof and their consumption baskets sensitive to its more volatile components.
Source : VOXeu
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