From labor to intermediates: Firm growth, input substitution, and monopsony

Matthias Mertens and Benjamin Schoefer

No 24/2024, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We document and dissect a new 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 fact using German firm-level data and replicate it in administrative firm data from 11 additional countries. We also document these patterns in micro-aggregated industry data for 20 European countries (and, with respect to industry cost shares, for the US). We rationalize this novel regularity within a parsimonious model featuring (i) an elasticity of substitution between intermediates and labor that exceeds unity, and (ii) an increasing shadow price of labor relative to intermediates, due to monopsony power over labor or labor adjustment costs. The shift from labor to intermediates accounts for one half to one third of the decline in the labor share in growing firms (the remainder is due to wage markdowns and markups) and rationalizes most of the labor share decline in growing industries.

Keywords: firm growth; labor-intermediate substitution; labor share; monopsony (search for similar items in EconPapers)
JEL-codes: D24 E23 J23 J42 L60 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-com and nep-eff
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https://www.econstor.eu/bitstream/10419/307130/1/1909617210.pdf (application/pdf)

Related works:
Working Paper: From Labor to Intermediates: Firm Growth, Input Substitution, and Monopsony (2024)
Working Paper: From Labor to Intermediates: Firm Growth, Input Substitution, and Monopsony (2024)
Working Paper: From labor to intermediates: Firm growth, input substitution, and monopsony (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:307130

DOI: 10.18717/dp9bak-0132

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