Cover of EconPol Working Paper 44

Markups in a Dual Labor Market: The Case of the Netherlands

Gerrit Hugo van Heuvelen, Leon Bettendorf, Gerdien Meijerink (EconPol Europe, CPB Netherlands Bureau for Economic Policy Analysis)

An expanding body of research finds a sharp increase in the average markups in the US and Europe, driven by firms located at the top of the markup distribution; other studies find that markups in the US and Europe have increased only moderately or even remained stable. These differing results have triggered a discussion on methodology, a key issue being the choice of the free input in the production function approach. Authors Gerrit Hugo van Heuvelen, Leon Bettendorf and Gerdien Meijerink (EconPol Europe, CPB Netherlands Bureau for Economic Policy Analysis) show that the choice of the free input is crucial, and may explain at least some of the discrepancies in the findings in the recent literature. They illustrate this with the case of the Netherlands, which has a large share of flexible work arrangements and temporary labor contracts as well as fixed contracts.

Abstract

We follow the production function approach to assess markups, which requires the estimation of the output elasticity of a free input. In the basic setup we estimate a structural value added production function, using temporary contract hours as free input. We find rather stable markups in the Netherlands in the period 2006-2016. We show that extending the free variable incorrectly with fixed contract hours results in an increasing markup. Findings are robust to an alternative setup, in which a gross output function is specified and materials are used as free input. Implications for applied work and policy are discussed.

Citation

Gerrit Hugo van Heuvelen, Leon Bettendorf, Gerdien Meijerink: Markups in a Dual Labor Market: the Case of the Netherlands, EconPol Working Paper 44