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Monetary policy and the firm-level labor share: a story about capital

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  • Steininger, Lea
  • Matzner, Anna

Abstract

We study the heterogeneous pass-through of monetary policy across firms with different labor shares. The goal is to obtain evidence on a labor-intensity transmission channel that should in fact be operating for other kinds of demand shocks as well. Our basic idea is that labor is special: unlike capital, it cannot be pledged against loans as collateral due to property rights. Based on a sample of over one million European firms, we document substantial heterogeneity in terms of firms’ investment response: when conditions tighten, fixed capital stock of labor-intensive firms decreases relative to capital-intensive production. These findings cannot be explained by other proxies for financial constraints such as age, size or financial leverage. Our results suggest that the impact of monetary policy is driven by borrowing constraints of high labor share firms, and that monetary policy is more potent in an economy characterized by a high labor share. JEL Classification: D22, E52, D31, E23, E32

Suggested Citation

  • Steininger, Lea & Matzner, Anna, 2025. "Monetary policy and the firm-level labor share: a story about capital," Working Paper Series 3024, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253024
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    References listed on IDEAS

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    More about this item

    Keywords

    factor input costs; financial constraints; firm heterogeneity; labor share; monetary policy;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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