Marginal cost and price over the business cycle: Comparative evidence from Japan and the United States

Abstract

We estimate marginal cost over the cycle for Japan and the US, concentrating on the intensive margin of the firm's activity. Estimation is undertaken for 16 two-digit industries over a 30-year period to the early 1990s. Cost movements consist of changes in the nominal wage, movements along the marginal wage schedule, and changes in total hours per unit of output. Marginal cost implications of variations in the proportions of overtime/total hours and in marginal overtime premiums are accommodated. We also provide estimates of the cyclical behaviour of price-cost mark-ups. Marginal cost is found to be counter-cyclical in both countries due principally to the influence of pro-cyclical labour productivity. A pro-cyclical mark-up is found for both countries, although stronger in the US.