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Profit Margins, Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms

Jose C. Fariñas () and Elena Huergo ()

Oxford Bulletin of Economics and Statistics, 2003, vol. 65, issue 1, 49-72

Abstract: The objective of this paper is to investigate the cyclical behaviour of mark‐ups, using a panel of Spanish manufacturing firms over the period 1990–1998. Margins are estimated from the optimal conditions derived from the firm's optimisation problem, which assumes that labour inputs are subject to adjustment costs. A number of results emerge from the estimations. First, we find positive and asymmetric adjustment costs for permanent labour inputs. Second, price‐cost margins are markedly procyclical. Our estimates suggest that labour adjustment costs more than double the variability of average margins with respect to Lerner indexes. Third, we find differences in the parameters of the adjustment technology across industries which make markups of intermediate and production good industries more cyclical than consumer good industries. Finally, industry‐specific price‐cost margins are higher in more concentrated industries.

Date: 2003
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Oxford Bulletin of Economics and Statistics is currently edited by Christopher Adam, Anindya Banerjee, Christopher Bowdler, David Hendry, Adriaan Kalwij, John Knight and Jonathan Temple

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