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

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  • Jose C. Farinas

    (Universidad Complutense de Madrid)

  • Elena Huergo

    (Universidad Complutense de Madrid)

Abstract

The objective of this paper is to investigate the cyclical behaviour of markups, 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. Copyright Blackwell Publishing Ltd, 2003.

Suggested Citation

  • Jose C. Farinas & Elena Huergo, 2003. "Profit Margins, Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(1), pages 49-72, February.
  • Handle: RePEc:bla:obuest:v:65:y:2003:i:1:p:49-72
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    Cited by:

    1. José Manuel Montero & Alberto Urtasun, 2014. "Price-cost mark-ups in the Spanish economy: a microeconomic perspective," Working Papers 1407, Banco de España;Working Papers Homepage.
    2. Laurent Maurin & Moreno Roma & Igor Vetlov, 2011. "Profit Dynamics across the Largest Euro Area countries and Sectors," Bank of Lithuania Working Paper Series 12, Bank of Lithuania.
    3. Ángel Estrada & David López-Salido, 2005. "Sectoral mark-up dynamics in Spain," Working Papers 0503, Banco de España;Working Papers Homepage.
    4. Andrea Vaona, 2016. "A nonparametric panel data approach to the cyclical dynamics of price-cost margins in the fourth Kondratieff wave," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 6(2), pages 155-170, August.
    5. Arnab Bhattacharjee & Chris Higson & Sean Holly, 2015. "Operating Leverage over the Business Cycle," Cambridge Working Papers in Economics 1535, Faculty of Economics, University of Cambridge.
    6. Jacques-Bernard Sauner-Leroy, 2003. "The impact of the implementation of the Single Market Programme on productive efficiency and on mark-ups in the European Union manufacturing industry," European Economy - Economic Papers 2008 - 2015 192, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Jan Askildsen & Øivind Nilsen, 2010. "Markup cyclicality and input factor adjustments," Empirical Economics, Springer, vol. 38(2), pages 409-428, April.
    8. Lourdes Moreno Martín & Diego Rodríguez Rodríguez, "undated". "Domestic and Foreign Price-Marginal Cost Margins: An Application to Spain Manufacturing Firms," Working Papers on International Economics and Finance 00-03, FEDEA.
    9. Vaona, Andrea, 2010. "A nonparametric panel data approach to the cyclical dynamics of price-cost margins," Kiel Working Papers 1580, Kiel Institute for the World Economy (IfW).

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