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We use a major labor cost cut of several percents in the form of a tax credit to infer the price response to a drop in labor marginal cost, using firm-level data. We account for common elements determining firm-level prices with a factor model at the sector level. Thus, we model within-sector shocks that affect firms with an individual and permanent loading. By controlling for unobserved heterogeneity and disaggregated prices of input, we provide a short-term counterfactual to assess the impact of the tax credit on prices. Our results suggest that not all sectors are passing the tax benefit on their clients : we find that the sectors for which significant pass-through arise are those having the highest share of eligible labor in total cost, i.e. mostly low-skilled and labor-intensive services. In addition, the pass-through is a lengthy process : significant effects are measured one to two years after the announcement of the policy.
