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

Jan Philipp Fritsche, Lea Steininger

Publication: Working/Discussion PaperWU Working Paper

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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.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Number of pages36
Publication statusPublished - 1 Jul 2022

Publication series

SeriesDepartment of Economics Working Paper Series

WU Working Paper Series

  • Department of Economics Working Paper Series

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