Intermediate Input Prices and the Labor Share

Juanma Castro-Vincenzi and Benny Kleinman
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Juanma Castro-Vincenzi: The University of Chicago, Department of Economics and NBER
Benny Kleinman: Stanford University, Department of Economics and NBER

No 2026-58, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We argue that the relative price of materials is an important determinant of the labor share of income. When materials and primary inputs are complements and the profit share is positive, a higher price of materials lowers the labor share and raises the profit share of value added, without requiring markups or returns to scale to change. We show that materials-price fluctuations align with U.S. labor-share trends, provide causal evidence on this mechanism across industries and commuting zones, and quantify its importance in a dynamic quantitative model. Finally, we use our mechanism to rationalize differential labor-share trends across countries. Length: 103 pages

JEL-codes: D2 E24 E25 F16 (search for similar items in EconPapers)
Date: 2026
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