Markup Cyclicality, Employment Adjustment, and Financial Constraints

We investigate the existence of markups and their cyclical behaviour. Markup is not directly observed. Instead, it is given as a price-cost relation that is estimated from a dynamic model of the firm. The model incorporates potential costly employment adjustments and takes into consideration that firms may be financially constrained. When considering size of the future labour stock, financially constrained firms may behave as if they have a higher discount factor, which may affect the realised markup. The markups and their fluctuations are estimated for different sectors using firm and plant level data for Norwegian manufacturing industries. The results indicate a frequent presence of procyclical markups but also countercyclical markups are found. Financial constraints do not seem to be negligible and adjustments costs are small.