From Labor to Intermediates: Firm Growth, Input Substitution, and Monopsony

We document and dissect a 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.

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Matthias Mertens (Massachusetts Institute of Technology, MIT)

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IWH, conference room and via Zoom

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Dr Matthias Mertens is a Research Scientist at MIT FutureTech. His research interests are macroeconomics, firm dynamics, labor economics, applied microeconomics and economics of AI.

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We document and dissect a 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 regularity in firm data for Germany and in firm (and industry) data for 11 (20) additional countries, and also in response to exogenous product demand shocks. We explain this regularity through a parsimonious model featuring an elasticity of substitution between intermediates and labor above one, and an increasing shadow price of labor (monopsony or adjustment costs). Our firm growth regressions identify a labor-intermediates substitution elasticity between 1.8 and 4.2. Labor-intermediates substitution also accounts for much of the labor share decline that we document accompanies firm and industry growth. Read more …