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Markups and oil prices in Canada

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  • Khan, Hashmat
  • Kim, Bae-Geun

Abstract

The markup (the ratio of price to marginal cost) in Canada has risen steadily since the early 1990s suggesting a widening gap between the actual and the efficient level of output and a declining share of labor income in GDP. It exhibits non-stationary movements over the sample period 1982Q1 to 2009Q4, allowing us to identify a permanent markup shock. We provide evidence that oil price movements are important for understanding the behavior of the markup, and separately identify both oil price shocks and permanent non-oil markup shocks. Our key findings are: (1) oil price shocks and non-oil markup shocks account for 50 to 80percent of the variation in the markup, with the former dominating at shorter horizons; (2) the role of oil price shocks is prominent in accounting for the upward trend in the markup since the mid-1990s; (3) the direct effects of oil prices on the markup in the mining sector (which includes the oil-producing sector) have contributed the most to the upward trend in the aggregate markup; and (4) other explanations such as market structure shifts, trend inflation movements and the falling relative price of investment do not appear to account for the behavior of the markup.

Suggested Citation

  • Khan, Hashmat & Kim, Bae-Geun, 2013. "Markups and oil prices in Canada," Economic Modelling, Elsevier, vol. 30(C), pages 799-813.
    • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:799-813
    DOI: 10.1016/j.econmod.2012.10.017
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    Cited by:

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    2. Ma, Xiaohan, 2023. "Oil uncertainty and the price-cost markup: Evidence from U.S. data," Energy Economics, Elsevier, vol. 124(C).
    3. Ms. Deniz O Igan & Ali Mirzaei & Tomoe Moore, 2018. "How Do Regulations of Entry and Credit Access Relate to Industry Competition? International Evidence," IMF Working Papers 2018/084, International Monetary Fund.
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    6. Bae-Geun Kim, 2016. "Explaining movements of the labor share in the Korean economy: factor substitution, markups and bargaining power," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 14(3), pages 327-352, September.

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    More about this item

    Keywords

    Permanent markup shocks; Oil prices; Market structure; Declining labor income share;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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