PRICES AND COSTS: Corrections to the Labor-Share Measure of Real Marginal Cost

The last twelve rows of Table 1 report the correlations of the labor share in the nonfinancial corporate sector with leads and lags of the four cyclical indicators. The correlations with the lags are uniformly positive and attain their biggest value when the cyclical indicator is lagged four quarters. Thus a high level of activity is associated with subsequent increases in the labor share. Interestingly, this result also extends to the case where we study the cross-correlogram of H-P filtered output and the H-P filtered labor share. The correlations of the labor share with the leads of our cyclical indicators are uniformly negative. This means that the labor share peaks before the peak in hours.

Corrections to the Labor-Share Measure of Real Marginal Cost

While the labor share (or equivalently, the ratio of price to unit labor cost) is a familiar and easily interpretable statistic, it represents a valid measure of markup variations only under relatively special assumptions. In this section, we briefly discuss a number of corrections to this measure that would arguably be required to obtain a more realistic measure of real marginal cost. As we shall see, several of these corrections imply that real marginal cost is more procyclical than the labor share.
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PRICES AND COSTS: Cyclical Behavior of Markups 4

For this slightly more formal statistical analysis, we considered four indicators of the business cycle. A popular indicator of this sort is obtained by detrending real GDP using the Hodrick-Prescott filter and then using this detrended series to be a measure of the business cycle. This is, however, a rather arbitrary procedure (since there is no obvious reason to choose one value rather than another of the weighting parameter that determines the degree to which the trend is smoothed).

An alternative that we find appealing is to follow Beveridge and Nelson (1980) and equate the “cyclical” level of GDP at time t with the expected decline in GDP from time t onwards. This captures the intuitive idea that cyclical movements are temporary, so that a cyclically low level of output corresponds to a high expected rate of growth of output. The difficulty with this approach is that it only becomes meaningful when one specifies an information set that can be used to forecast GDP growth. Following on the steps of an extensive literature, Rotemberg and Woodford (1996a) show that the linearly detrended level of hours spent working in nonagricultural establishments and the ratio of consumer expenditures on nondurables and services to GDP are particularly useful in this respect.
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PRICES AND COSTS: Cyclical Behavior of Markups 3

The first of these measures is less satisfactory than the others for two reasons. First, it includes the government, many of whose services are not sold in markets. Second, it includes income of proprietors in the denominator, and this contains an element of compensation as well. The use of the narrower measures of the labor share eliminates both of these problems. Nonetheless, we include some statistics relating to the overall labor share as well, for comparability with other studies.
Figure 1 plots these three series for the period 1947:1 to 1993:l.12 For future reference, the figure also plots the Hodrick-Prescott trend in the labor share for the nonfinancial corporate sector. The figure reveals that the labor share in the corporate sector is essentially identical to the labor share in the nonfinancial segment. On the other hand, the overall labor share deviates from the other two shares in the early 1960’s and remains above them from then on. All three series show large increases in the late 1960’s. Particularly for the labor share corresponding to the whole economy, this appears to represent a structural break that cannot be regarded as an example of business-cycle variation in the series. Hence in considering the cyclical behavior of the series, we also considered a sample that begins only in 1970.
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PRICES AND COSTS: Cyclical Behavior of Markups 2

This equation provides an approach to the measurement of markup (or real marginal cost) variations. It also highlights two reasons for the real marginal cost schedule referred to
in section 1 to be upward-sloping. The first is that, holding constant other determinants of labor supply, the real wage must presumably rise to induce more people to work. The second is that, if one makes the standard assumption that the production function F is concave and one fixes both the capital stock and the state of technology 2, the marginal product F# is a decreasing function of the labor input.
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Whether or not typical increases in employment are in fact associated with markup declines depends, however, upon whether they are associated with increases in К or z, or decreases in the real wage W/P, sufficient to offset the effects of the increase in the labor input on F#. In general, real wages do not move counter cyclic ally, and in fact, there is clearly procyclical variation in the real wages received by individuals, once one corrects for cyclical variation in the composition of the workforce.
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PRICES AND COSTS: Cyclical Behavior of Markups

Wre then proceed to study responses of markups to particular shocks. Insofar as we are able to identify nontechnological disturbances, the analysis of markup changes is considerably simplified because we do not have to worry about the effect of technical progress on the real marginal cost schedule. Section 2 closes with an analysis of the differences in markup variations across industries. If you are interested in fair instant pay day loans, you are looking at the right lender. Feel free to apply at www.speedy-payday-loans.comto get our reasonably prices loans and be sure you can repay them in time. We are honest with you, so you can be sure the solution does not come with any unpleasant consequences.

Section 3 then turns to the consequences of markup variations for macroeconomic variables of interest. First we deal with the effect of markup changes on productivity and profits. We show that, under a variety of circumstances, increases in output that are caused by reductions in markups are associated with increases in profits and measured productivity. Since both productivity and profits are known to be procyclical, this is important in making sure that it is not implausible for changes in markups to be behind movements in output.
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PRICES AND COSTS: Introduction 4

Such a crude view, however, is difficult to take seriously. While we believe that nominal price stickiness plays a role, at least in short-run fluctuations in activity – and this is one of the reasons for markup variation taken up in section 4 below – it is not plausible that the level of marginal costs should not be a crucial determinant of the evolution of prices. If a firm’s price is expected to remain fixed for a period of time, then the price chosen will depend not solely upon the current level of marginal cost, but upon (loosely speaking) the average of the expected levels of marginal cost over the entire period for which the price will be fixed.

As a consequence, the rate of inflation (and expectations regarding future inflation) will be one of its determinants, as is explained further in section 4.1 below. In such a model, the connection between inflation and real activity (i.e., the aggregate supply relation) can be usefully understood as resulting from the relation between inflation and the average markup, on the one hand, and the relationship between the markup and output determination indicated by (1.1). Very easy small business loans that we offer are something you cannot miss if you need money and have no time to look for someone to loan it to you. We represent a flexible financial tool that you can resort to any time you need, especially with our reasonable APR and friendly support. Get one here
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PRICES AND COSTS: Introduction 3

Once one has made these assumptions, however, one need only make a few additional suppositions to obtain an estimate of the derivative of the function с with respect to Y. This then allows one to infer the output fluctuations induced by changes in measured markups, the result is that one obtains a decomposition of output in terms of output movements due to markup changes and output movements due to shifts in the marginal cost schedule. We consider this decomposition in section 3. website

Section 4 is devoted to a brief survey of models of variable markups. The above decomposition makes it clear that these models can serve two separate purposes. First, they can affect the extent to which shifts in the marginal cost schedule affect output. If, for example, reductions in marginal cost lower markups, their effect on output is magnified. What is perhaps more interesting still is that these theories allow shocks other than shocks to the marginal cost schedule to affect output as long as these shocks affect markups. In particular, allowing for endogenous markup variations adds a channel through which demand disturbances may affect output and employment.
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