How Costly Are Markups?

International Diversification, Reallocation, and the Labor Share

“…Notably, the result holds even in the Cobb-Douglas case with common parameters across firms, showing that the standard equivalence between labor's share of income and production fails to hold when firms make labor choices in the face of uncertainty and aggregate risk. Further, the risk premium shows up as what would otherwise be measured as a wedge in firm-level labor shares and hence helps rationalize recent findings of significant and heterogeneous price markups (e.g., De Loecker et al, 2020;Edmond et al, 2018) and/or wage markdowns (e.g., Berger et al, 2022;Yeh et al, 2022), despite the fact that the economy is in fact perfectly competitive. 8…”

“…In our framework, labor risk premia show up as markups in firm-level data, which connects our paper to a recent and growing literature studying the distribution of firm-level markups and its evolution over recent decades, important examples of which include De Loecker et al (2020) and Edmond et al (2018). Our theory provides a note of caution in interpreting measured markups as pure rents to the firm -rather, in our setting, the measured markup captures the risk premia required by the firm to bear labor market risk, and thus may not be indicative of firm market power.…”

The Race Between Preferences and Technology

“…37 Using Compustat data and the production function approach to compute markups, the headline series in De Loecker, Eeckhout, and Unger (2020) shows a much larger increase when using sales weights to aggregate firm markups. The relevant aggregation method to assess the contribution to the labor share decline is cost weighting, as discussed in Edmond, Midrigan, and Xu (2022); using this aggregation, they find an increase of about 10 log points. Hubmer and Restrepo (2021) show that allowing for heterogeneity in technology by firm size in the production function approach to estimate markups implies a smaller increase of at most 5 log points.…”

Investment-Goods Market Power and Capital Accumulation

“…De Loecker, Eeckhout, and Unger (2020) studies the evolution of markups over time in the US economy. Edmond, Midrigan, and Xu (2023) provide a quantitative analysis of the social cost of markups. While many studies focus on imperfect competition and price dynamics in output markets (e.g., Mongey, 2021;Wang and Werning, 2022;Burstein, Carvalho, and Grassi, 2023), several recent paper focus on market power and firm granularity in input markets, such as the labor market (e.g., Berger, Herkenhoff, and Mongey, 2022;Jarosch, Nimczik, and Sorkin, 2023), and the credit market Villa (2023).…”