Markups in a Dual Labor Market: The Case of the Netherlands
An expanding body of research finds a sharp increase in the average markups in the US and Europe, driven by fi rms 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 fi ndings 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.
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 fi nd rather stable markups in the Netherlands in the period 2006-2016. We show that extending the free variable incorrectly with fi xed contract hours results in an increasing markup. Findings are robust to an alternative setup, in which a gross output function is specifi ed and materials are used as free input. Implications for applied work and policy are discussed.
Gerrit Hugo van Heuvelen, Leon Bettendorf, Gerdien Meijerink: Markups in a Dual Labor Market: the Case of the Netherlands, EconPol Working Paper 44