… what happens if, for whatever reason, competition in an economy dwindles, and companies are able to ratchet up prices much higher than what it costs to produce them? It would have disastrous effects. Workers’ wages and employment rates would decline. People would switch jobs less often. Economic growth would slow.
According to economists Jan De Loecker of Princteon University and Jan Eeckhout of the University College London, this is basically describes the US economy since 1980. In a recently released paper, De Loecker and Eeckhout analyzed the balance sheets of listed companies from 1950 to 2014. (In 2014, these firms accounted for around 40% of all sales.) They found that average markups, defined as the amount above cost at which a product is sold, have shot up since 1980. The average markup was 18% in 1980, but by 2014 it was nearly 70%.
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The main thrust of the paper is to show that markups are rising, not to describe why, but De Loecker and Eeckhout offer a few possible explanations, including an increase in mergers and acquisitions alongside deregulation. Their research is part of an emerging literature suggesting that the US economy is steadily becoming less competitive, and the average worker is worse off because of it.
Interesting indeed. You know what else has soared since 1980? Financialization… probably no connection? </sarc>