Finance and Economics Discussion Series

Factor Intensity and Price Rigidity: Evidence and Theory

Ekaterina V. Peneva
2009-07

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: Price rigidity, wage rigidity, factor intensity