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The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics

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  • Lea Steininger

    (Department of Economics, Vienna University of Economics and Business)

  • Jan Philipp Fritsche

    (Humboldt University of Berlin, German Institute for Economic Research)

Abstract

We study the role of firm heterogeneity and cost structure in determining the transmission of monetary policy. Using local projections and high dimensional fixed effects, we show that a one standard deviation contractionary monetary policy shock decreases firms' labor share by 0.4 percent, on average. However, reactions are heterogeneous along two dimensions: The labor share is most informative to discriminate firms by their response in payroll expenses, firms' leverage is most informative to discriminate by their response in value added. We interpret these findings by theorizing differential effects of factor input costs. Our results inform the policy debate on transmission and redistribution effects of monetary policy, and suggest that the effectiveness of monetary policy may depend on the labor intensity of production.

Suggested Citation

  • Lea Steininger & Jan Philipp Fritsche, 2022. "The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics," Department of Economics Working Papers wuwp326, Vienna University of Economics and Business, Department of Economics.
    • Handle: RePEc:wiw:wiwwuw:wuwp326
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    More about this item

    Keywords

    Monetary policy; firm heterogeneity; labor share; production dynamics; factor input costs;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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