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

Lea Steininger () and Jan Philipp Fritsche
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Lea Steininger: Department of Economics, Vienna University of Economics and Business

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

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.

Keywords: Monetary policy; firm heterogeneity; labor share; production dynamics; factor input costs (search for similar items in EconPapers)
JEL-codes: D22 D31 E23 E32 E52 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-lab and nep-mon
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Working Paper: The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics (2022)
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