Procyclical markups, business cycles and the labor market

The first chapter of this dissertation examines the cyclical properties of the markup of price over marginal cost. The cyclicality of the markup is used to evaluate alternative models of the business cycle. The share of profit in total revenue identifies the ratio of the elasticity of scale to the markup. By assuming that the elasticity of scale is constant, it can be estimated using Hall's (1990) approach. A time series for the markup is then constructed using this estimate and the profit share data for a number of disaggregated US manufacturing industries. The central conclusion of the first chapter is that markups are procyclical for most of the industries considered here, especially for durable goods industries. This finding contradicts one set of business cycle models which rely on countercyclical markups.;An important assumption used in measuring the markup in Chapter one was that market factor prices equal shadow factor prices. The existence of a wedge between the two has important implications for measurement and interpretation of the markup. The second chapter addresses this problem by examining the aggregate labor market. Two alternative representations are examined. The first is the competitive neoclassical labor market where the market wage equals the worker's value of time (the shadow wage). I conclude that it is difficult to reconcile the spot market model with observed movements in consumption, hours and wages. An alternative model is an efficient contract or wage smoothing model. A simple representation of the contracting model is examined and yields mixed results.