The Impact or Labor Market Institutions on Markups and Markdowns: Evidence from Manufacturing and Service Sectors in Uruguay

Mar 30, 2021

In 2005, after a leftist coalition won the national election for the first time, significant changes took place in labor institutions in Uruguay, including the establishment of sector-level wage bargaining councils with active government participation.

This paper estimates the impact of these institutional changes on price markups and wage markdowns using firm-level data for the period 2002-2016. It reports markdowns that decrease and firm-level markups that increase slightly rather than sharply (as has been reported for developed countries).

This paper finds statistically significant impacts of mandated wage changes on markups and markdowns and statistically significant effects of unions on wage markdowns (but not price markups). The evidence suggests that firms operate in monopsonistic labor markets, but that the degree of their bargaining power has decreased over time as a result of the wage councils. In response, firms were able to pass part of the increases in labor costs to consumers.

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