Working Paper

Factor intensity and price rigidity: evidence and theory

Abstract: This paper establishes a new empirical finding: the degree of labor intensity and the degree of price flexibility are negatively correlated across industrial sectors. I model this in an economy with staggered nominal wage contracts and production sectors that differ in labor and capital intensities. Nominal disturbances affect capital-intensive and labor-intensive sectors asymmetrically: prices of labor-intensive goods change less than do prices of capital-intensive goods. In addition, when prices are costly to adjust, more firms in the capital-intensive sectors optimally choose to update their prices than firms in the labor-intensive sectors. Thus, varying factor intensity generates different degrees of price stickiness across sectors that face the same degree of wage rigidity.

Keywords: Prices; Wages;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2009

Number: 2009-07