International journal of industrial organization vol:22 issue:10 pages:1381-1398
This paper extends Hall's (1988) [Hall, R.E., 1988. The relationship between price and marginal cost in US industry, Journal of Political Economy, 96, 921-947] methodology to analyze imperfections in both the product and the labor market for firms in the Belgian manufacturing industry over the period 1988-1995. We investigate the heterogeneity in price-cost mark-up and workers' bargaining power parameters among 18 sectors within the manufacturing industry as well as the relationship between both parameters. Using a sample of more than 7000 firms, our GMM results indicate that ignoring imperfection in the labor market leads to an underestimation of the price-cost margin evaluated at perfect competition in the labor market. These findings are confirmed in the sectoral analysis. Sectors with higher workers' bargaining power typically show higher price-cost margins. (c) 2005 Elsevier B.V. All rights reserved.