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The profit share and firm markup: how to interpret them?

Author

Listed:
  • Fabrizio Colonna

    (Banca d'Italia)

  • Roberto Torrini

    (Banca d'Italia)

  • Eliana Viviano

    (Banca d'Italia)

Abstract

This paper discusses, theoretically and empirically, the relationship between two indicators: the profit share in value added and markups. While many commentators simply interpret the profit share as a proxy for markup, we show that with a production function with two inputs (i.e. labour and intermediates), the profit share can increase even if markups remain constant or diminish. This occurs when intermediate input costs grow faster than labour costs (as in the current economic situation) and input substitutability is limited (as with energy and labour, in the short run). Unfortunately, markups cannot be easily calculated using national accounts data, but approximate data are available for some sectors in Germany and Italy. We can thus show that markups in industry and in manufacturing remained constant in Germany in 2022, but increased considerably in construction, retail, accommodation and transport. In Italy, instead, markups returned to their pre-pandemic levels following a series of adjustments during the health emergency.

Suggested Citation

  • Fabrizio Colonna & Roberto Torrini & Eliana Viviano, 2023. "The profit share and firm markup: how to interpret them?," Questioni di Economia e Finanza (Occasional Papers) 770, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_770_23
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2023-0770/QEF_770_23.pdf
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    Citations

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    Cited by:

    1. Timo Wollmershäuser & Stefan Ederer & Maximilian Fell & Friederike Fourné & Max Lay & Robert Lehmann & Sebastian Link & Sascha Möhrle & Ann-Christin Rathje & Radek Šauer & Moritz Schasching & Marcus S, 2023. "ifo Konjunkturprognose Sommer 2023: Inflation flaut langsam ab – aber Konjunktur lahmt noch," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(Sonderaus), pages 01-53, June.
    2. Bijnens, Gert & Duprez, Cédric & Jonckheere, Jana, 2023. "Have greed and rapidly rising wages triggered a profit-wage-price spiral? Firm-level evidence for Belgium," Economics Letters, Elsevier, vol. 232(C).

    More about this item

    Keywords

    markup; profit shares; inflation;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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