The Price-Marginal Cost Markup and its Determinants in U.S. Manufacturing

This paper estimates the price-marginal cost markup for U.S. manufacturing using a new methodology.  Most existing techniques of estimating the markup are a variant on Hall’s (1988) framework involving the manipulation of the Solow Residual.  However, this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate.  By relaxing this assumption, we are able to derive a generalized markup index, which when estimated using manufacturing data is highly countercyclical and decreasing in trend since the 1960s.  When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry.  Thus, increasing foreign competition in manufacturing has led to a decline in the industry’s markup over time.