Intermediate Input Prices and the Labor Share
Joint work with Benny Kleinman
We explore how the labor share relates to the price of materials in the economy. Under imperfect competition and complementarity between materials and primary inputs, a higher price of materials lowers the labor share and raises the profit share, without requiring markups to change. We show that fluctuations in materials prices align with trends in the U.S. labor share, including a sharp decline during the 2000s commodity boom; provide causal evidence for this mechanism across industries and commuting zones; and quantify its importance using an input-output general equilibrium model. Finally, we use our mechanism to rationalize differential trends across countries.
