No. 770 - The profit share and firm mark-up: how to interpret them?

Vai alla versione italiana Site Search

by Fabrizio Colonna, Roberto Torrini and Eliana VivianoMay 2023

Many analysts have interpreted the profit share increase in value added observed in many Eurozone countries and in the United States after the pandemic as indicating inflationary pressures generated by firms' pricing strategies. In this paper, we show that a greater profit share is not to be unambiguously interpreted as an increase in firms' profit margins (markups), unless highly restrictive conditions for the combination of factors in the production process are met.

The paper shows that the profit share of value added can increase even if markups remain constant or decrease when the price of intermediate inputs grows more quickly than labour costs and these two factors exhibit limited substitutability. Available data for 2022 indicate that profit share increases were, in fact, associated with stationary or negative markup in many sectors both in Germany and in Italy.

Full text