The Kraków Ghetto was one of five major, metropolitan Jewish ghettos created by Nazi Germany in the new General Government territory (General gouvernement) during the German occupation of Poland in World War II. It was created for the purpose of exploitation, terror, and persecution of local Polish Jews as well as the staging area for separating the "able workers" from those who would later be deemed unworthy of life. The Ghetto was liquidated between June 1942 and March 1943, with most of its inhabitants sent to Belzec extermination camp and Płaszów labor camp, and exterminated also at Auschwitz concentration camp Schindler's ties with the Abwehr and his connections in the Wehrmacht and its Armaments Inspectorate enabled him to obtain contracts to produce enamel cookware for the military. These connections also later helped him protect his Jewish workers from deportation and death. As time went on, Schindler had to give Nazi officials ever larger bribes and gifts of luxury items obtainable only on the black market to keep his workers safe. Bankier, a key black market connection, obtained goods for bribes as well as extra materials for use in the factory. Schindler himself enjoyed a lavish lifestyle and pursued extramarital relationships with his secretary, Viktoria Klonowska, and Eva Kisch Scheuer, a merchant specialising in enamelware from DEF. Emilie Schindler visited for a few months in 1940 and moved to Kraków to live with Oskar in 1941.

Initially Schindler was mostly interested in the money-making potential of the business and hired Jews because they were cheaper than Poles – the wages were set by the occupying Nazi regime. Later he began shielding his workers without regard for cost. The status of his factory as a business essential to the war effort became a decisive factor enabling him to help his Jewish workers. Whenever Schindlerjuden (Schindler Jews) were threatened with deportation, he claimed exemptions for them. Wives, children, and even persons with disabilities were claimed to be necessary mechanics and metalworkers. On one occasion, the Gestapo came to Schindler demanding that he hand over a family with forged identity papers. "Three hours after they walked in," Schindler said, "two drunk Gestapo men reeled out of my office without their prisoners and without the incriminating documents they had demanded." On 1 August 1940 Governor Hans Frank issued a decree requiring all Kraków Jews to leave the city within the next two weeks. Only those who had jobs directly related to the German war effort would be allowed to stay. Of the 60,000 to 80,000 Jews then living in the city, only 15,000 remained by March 1941. These Jews were then forced to leave their traditional neighbourhood of Kazimierz and relocate to the walled Kraków Ghetto, established in the industrial Podgórze district. Schindler's workers travelled on foot to and from the ghetto each day to their jobs at the factory.

In fall 1941 the Nazis began transporting Jews out of the ghetto. Most of these were sent to Belzec extermination camp and killed. On 13 March 1943 the ghetto was liquidated and those still fit for work were sent to the new concentration camp at Płaszów. Several thousand not deemed fit for work were sent to extermination camps and killed. Hundreds more were killed on the streets by the Nazis as they cleared out the ghetto. Schindler, aware of the planned action because of his Wehrmacht contacts, had his workers stay at the factory overnight to prevent them coming to any harm. Schindler witnessed the liquidation of the ghetto and was appalled. From that point forward, says Schindlerjude Sol Urbach, Schindler "changed his mind about the Nazis. He decided to get out and to save as many Jews as he could."

Schindler was arrested three times on suspicion of black market activities and complicity in embezzlement, as well as breaking the Nuremberg Laws by kissing a Jewish girl. Amon Göth, the commandant of the Płaszów camp, and other SS guards used Jewish property (such as money, jewellery, and works of art) for themselves, although according to law, it belonged to the Reich. Schindler arranged the sale of such items on the black market. None of his arrests led to a trial, primarily because he bribed government officials to avoid further investigation.

As the Red Army drew nearer to Auschwitz concentration camp and the other easternmost concentration camps, the SS began evacuating the remaining prisoners westward. Amon Göth's personal secretary, Mietek Pemper, alerted Schindler to the Nazis' plans to close all factories not directly involved with the war effort, including Schindler's enamelware facility. Pemper also persuaded and encouraged Schindler to switch production from enamelware to anti-tank grenades in an effort to save Schindler's Jewish workers. Tipped off to the factory closure, Schindler persuaded the SS officials to allow him to move his 1,200 Jewish workers to Brünnlitz (Czech: Brněnec), in the German-speaking Sudetenland, thus sparing them from certain death in the gas chambers. Mietek Pemper further aided Schindler's efforts by compiling and typing the list of 1,200 Jews—1,000 of Schindler's workers and 200 other inmates—who were sent to Brünnlitz in October 1944.