Non-Labor Unit Costs, Marginal Costs And The New

This paper considers the role of non-labor unit costs in estimating the New Keynesian Phillips Curve (NKPC). The authors show that the theory-based marginal cost of a firm is a function of both labor and non-labor unit costs including, capital costs, net interest payments and production taxes. Using data on labor costs and non-labor payments in nonfarm GDP for the US, that closely match the theory-based model, they construct a total unit cost that they use as a proxy for marginal cost. They show that adding non-labor unit costs to the familiar unit labor costs improves the existing empirical support for the role of real marginal cost as the driving variable in the NKPC and of expectations-based inflation persistence.