Recent developments in non-financial corporations’ mark-ups

In recent years the competitiveness of the Spanish economy has improved sharply, most visibly so in terms of unit labour costs. As a result, and in terms of ULCs, as at end-2013 the cumulative losses in competitiveness since the onset of EMU had been practically corrected in full. With regard to changes in the HICP, the high differential built up in the 1997-2007 period has only been partly reduced, owing in part to dearer energy prices and to the increase in indirect taxation and in administered prices. The trend of the GDP deflator, which has been more contained in Spain than in the euro area in recent years, did not suffice to offset the downturn in relative prices in the upswing prior to 2007. To understand the factors behind these relatively uneven developments across this set of variables, it is worth analysing the behaviour of business mark-ups, which are the relevant variable for characterising corporate decisions on the extent to which the behaviour of production costs passes through to sale prices. However, mark-up analysis faces the difficulty of addressing a variable which normally cannot be observed directly. To negotiate this problem, one approach involves calculating business mark-ups at an aggregate scale by means of the gross operating surplus (GOS)/gross value-added (GVA) ratio of nonfinancial corporations (NFC). Nonetheless, this approach is not free from problems. Firstly, the GOS includes, among other factors, the return on capital and depreciation costs, which hampers its interpretation as corporate profit. In addition, an aggregate analysis masks sectoral differences that may be significant. Secondly, the measurement of GOS may differ depending on the statistical sources used, partly reflecting the methodological discrepancies in its compilation, as has occurred in the case of the Spanish economy in the recent period. Prompted by the foregoing discussion, and with the aim of obtaining a measure of markups that better represents the developments it is sought to examine, this article firstly estimates the mark-up of price over marginal cost of Spanish NFCs for the 1995-2011 period, drawing on disaggregated firm-level information. Secondly, it studies some of the possible determinants of the mark-ups over marginal cost estimated, especially those relating to the financial position of firms, or others, which may influence the degree of competition in which firms take their decisions. This type of analysis requires, therefore, the use of disaggregated information at the level of the firm or of the productive sector. Specifically, following the methodology used by Montero and Urtasun (2013), the analyses below used data from a panel of non-financial corporations that covers practically all two-digit sectors of activity for the 1995-2011 period. This sample combines information drawn from financial statements and from supplementary questionnaires compiled under the Banco de España Central Balance Sheet Data Office Annual Survey (CBA) and from the processing of the accounting information filed in the Mercantile Registers (CBB).5 In this way a sample with a high level of representativeness is achieved, both by sector and by company size. The article is structured as follows. The second section describes the dynamics of the mark-ups over marginal cost estimated with microeconomic data, while the third section looks into the possible determinants that would explain their behaviour during the most recent period. The final section draws the main conclusions.