UK markups and profit margins during the pandemic and its aftermath

We provide the first comprehensive analysis of markups and profit margins for the pandemic period and its aftermath in the UK using i) unconsolidated balance sheets of non-financial corporations, ii) data for both listed and unlisted firms, iii) the period of 2014 to 2022. Our sample consists of up to 68,600 firms per year. The markup increases by 14.7% in nine years between 2014 and 2022. This exceeds any previously documented growth rate for UK markups, despite a pandemic and major economic, ecological and geo-political crises. The rise in markups in 2020 was largely an attempt to cover extraordinary costs that arose in the first year of the pandemic. Firms, on average, were not successful in covering these costs, as indicated by a strong decline in the 2020 profit margin. However, markups remain elevated and did not return to their pre-pandemic average. Consequently, by 2022 profit margins have reached their historical peak, and indicative evidence for 2023 suggests that they might have risen even further since. This stands in contrast to the US where margins and markups returned to pre-pandemic levels. The markup increase is driven by both rising markups within UK companies and a reallocation of output towards high-markup firms. However, the within effect has dominated since 2020. In this regard, the UK is different from the US, where the reallocation effect has dominated. Since 2014 the markup distribution of firms in the UK has become more polarised. Increasingly more firms are at risk of financial difficulties due to low profit margins while at the same time, some firms are charging historically extraordinarily high markups and reap high profits. This contributes to bankruptcy risk and economic instability while exacerbating pricing power for some companies. Over 10,000 firms (15% of our sample) declared bankruptcy since March 2020, driven by pandemic-related restrictions, cost shocks, and rising interest rates. These are mostly small firms in service industries. Large firms have been the most consistent drivers of markup growth since 2014, but on average these are firms with relatively low markups. Key industries driving UK-wide markup dynamics include: IT, professional services, food, beverages, tobacco, and chemicals. There is indicative evidence that higher trade union density can constrain firms’ markup power because within-firm increases in markups tend to be lower in industries with higher union density. Markups, once increased, remain at a higher level. This exacerbates inflationary pressure and contributes to a redistribution of income from labour to capital, which increases income inequality. Preventing markup increases during economy-wide cost shocks like in 2020 should be a priority for policymakers. Essential steps to controlling pricing power and inflation in the UK will be to identify systemically significant prices and industries and manage future price shocks through shock absorbers such as price gauging laws or price controls, buffer stocks, financial support for especially small businesses and windfall and wealth taxes coupled with transfers to low-income households (Onaran, 2023; Weber and Wasner, 2023; Wildauer et al. 2023).