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Non-Labor Unit Costs, Marginal Costs and the New Keynesian Phillips Curve

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George Bratsiotis
Wayne Robinson

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Abstract

This paper considers the role of non-labor unit costs in estimating the new Keynesian Phillips curve (NKPC). We show that the theory-based marginal cost of a firm is a function of both labor and non-labor unit costs including, capital costs, net interest payments and production taxes. Using data on labor costs and non-labor payments in nonfarm GDP for the US, that closely match our theory-based model, we construct a total unit cost that we use as a proxy for marginal cost. We show that adding non-labor unit costs to the familiar unit labor costs improves the existing empirical support for the role of real marginal cost as the driving variable in the NKPC and of expectations-based inflation persistence. Total unit costs also imply a duration of fixed nominal contracts that is closer to those suggested by firm-level surveys than that implied by labor unit costs.

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File URL: http://www.socialsciences.manchester.ac.uk/cgbcr/dpcgbcr/dpcgbcr123.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 123.

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Length: 53 pages
Date of creation: 2009
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Handle: RePEc:man:cgbcrp:123

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