Interaction between product market and labour market power: evidence from France, Belgium and Chile

Abstract

This article jointly estimates price-cost mark-ups and union bargaining power of manufacturing firms in France, Belgium and Chile. Our GMM results provide strong evidence of price-cost mark-ups being underestimated when labour market imperfections are ignored, corresponding to the omission of the part of product rents captured by the workers.

Acknowledgements

This work is based on Crépon-Desplatz-Mairesse (1999, 2002), Dobbelaere (2004) and Contreras-Benavente (2006). We are particularly thankful to B. Crépon, R. Desplatz and J.S. Contreras, our co-authors in these articles.

Notes

¹ For technical details, see Crépon et al. (1999, 2002).

² Crépon et al. (1999) and Dobbelaere (2004) adopt a different formulation of the bargaining model. They assume that the firm has to bear both the costs of capital and the costs of materials in its fall-back position. The firm's objective is to maximize its short run profit defined as total revenue minus labour costs: R_it −w_itL_it . In this article, we follow Crépon et al. (2002) and assume that the short run profit of the firm is value added minus labour costs: R_it −j_it M_it −w_it L_it The firm has only to cover capital costs in its fall-back position.

³ The Klette-Griliches solution relies on the assumption that the market power of firms mainly arises from product differentiation. In a differentiated product market, the firm market share depends on its relative price within the industry, and hence the change in the firm relative price (ΔP _it  − ΔP _It ) can be expressed in terms of its output growth relative to the industry (Δq _it  − Δq _It ). See also Mairesse and Jaumandreu (2005).

⁴ For detailed information on the sample construction and the variable measurement, we refer to Crépon et al. (2002), Dobbelaere (2004) and Contreras and Benavente (2006), respectively.

Table 1 Summary Statistics

⁵ In Dobbelaere (2004), the Belgian manufacturing industry is split up into 18 sectors. For each sector separately, it is found that price-cost mark-ups are underestimated when labour market imperfections are ignored.