Markups, Real Wages, and Business Cycles

Ugyeong Jeong, Joo Hoon Kang and Joo Han Bae
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Ugyeong Jeong: Kwandong University
Joo Hoon Kang: Kwandong University
Joo Han Bae: Kwandong University

Korean Economic Review, 1997, vol. 13, issue 1, 177-188

Abstract: Markups and real wages have recently become central concepts in explaining the relationship between market structure and macroeconomic fluctuations. In this paper, we focus on the empirical testing about the patterns of markups and procyclicality of real wages in Korea using quarterly data during the period of (1970-1995). For that purpose, we construct a simple markup determination model derived from firms cost minimization principle assuming constant returns to scale technology. With this basic setup, we analyze the relationship between real wages, markups, and business cycles at industry level. We find several pieces of empirical evidence in this paper. First, the markup ratio is much greater than 1 in most of industries as in Hall (1988). Second, industries with high average markups tend to be largely fluctuating in the level of markups, which gives a certain insight that markups are affected by demand shocks. Third, markups have weak countercyclicality over GNP fluctuations. Fourth, real wages are shown to be procyclical. In addition to those evidence, it is noted that institutional factors such as labor movement could influence on markups，real wages, and economic growth to some extent in Korea.

Date: 1997
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