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From Labor to Intermediates: Firm Growth, Input Substitution, and Monopsony

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  • Matthias Mertens
  • Benjamin Schoefer

Abstract

We document and dissect a stylized fact about firm growth: the shift from labor to intermediate inputs. This shift occurs in input quantities, cost and output shares, and output elasticities. We establish this regularity in firm data for Germany and in firm (and industry) data for 11 (20) additional countries, and also in response to exogenous product demand shocks. We explain this regularity through a parsimonious model with two features: (i) an elasticity of substitution between intermediates and labor above one, and (ii) an increasing shadow price of labor (monopsony or adjustment costs). Our firm growth regressions identify a labor-intermediates substitution elasticity between 1.8 and 4.2. Labor-intermediates substitution also accounts for much of the labor share decline that we document accompanies firm and industry growth.

Suggested Citation

  • Matthias Mertens & Benjamin Schoefer, 2024. "From Labor to Intermediates: Firm Growth, Input Substitution, and Monopsony," NBER Working Papers 33172, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33172
    Note: CF EFG IO ITI LS ME PR
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    Cited by:

    1. Rubens, Michael & Wu, Yingjie & Xu, Mingzhi, 2025. "Estimating factor price markdowns using production models," International Journal of Industrial Organization, Elsevier, vol. 102(C).
    2. Rafael Guntin & Federico Kochen, 2025. "The Origins of Top Firms," Working Papers wp2025_2516, CEMFI.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • J0 - Labor and Demographic Economics - - General
    • L0 - Industrial Organization - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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