Intermediate Input Prices and the Labor Share
Joint work with Benny Kleinman
Reject and Resubmit, Econometrica
We explore how the labor share relates to the price of materials in the economy. Under conditions of imperfect competition and complementarity between materials and primary inputs, a higher price of materials lowers the labor share and raises the profit share of income, without requiring a change in markups. We show that fluctuations in materials prices align with aggregate trends in the U.S. labor share, including a sharp decline during the 2000s commodity boom and stabilization in recent years; provide causal evidence for this effect across industries and across local labor markets; and quantify the importance of our mechanism using an input-output general equilibrium model of the U.S. economy. We conclude that absent our mechanism, the labor share's decline would have been smaller and smoother. We extend our framework to a multi-country setting and demonstrate, theoretically and empirically, how shocks to global commodities yield heterogeneous changes in the labor share across countries.
