Evolution of price-cost margins during the troika intervention

The paper asks if the troika intervention of 2011 - 2014 helped promote a more competitive environment and improve the allocation of scarce resources to benefit economic growth and welfare. The question is generally pertinent, especially during this period where resources were scarce in the public, corporate, and financial sectors.

The paper uses data for the period 2010-2016 from Informação Empresarial Simplicaficada, a database containing the annual accounts of Portuguese manufacturing and services firms. It estimates price-cost margins for 190 markets from firm-level information in revenue growth, capital and labor costs, as well as capital and labor shares of output. Price-cost margins can give a sense of the competitiveness of a market as they capture the surplus extracted by firms from the consumer through its market power. Estimations are conducted separately for each market, yielding a market-based estimate of the price-cost margin.

Across all markets, the average estimated price-cost margin is around 32%. With regards to the troika intervention, the results in the paper suggest that the implemented reforms during this period had mixed results. On one hand, the average margin over price in most markets was stable over time and a positive association between price-cost margins and profits was found, rejecting the hypothesis that the reforms produced a significant change in the level of competition. On the other hand, several non-manufacturing sectors such as tourism, business services (consultants, lawyers, accountants, etc.) and construction did improve competition with lower price-cost margins, though for construction the change in price-cost margin was associated with a significant decrease in the level of activity.

The results also show a significant decrease in labor market frictions in the services sector, which suggests an increase in labor flexibility and a reduction in workers’ bargaining power. Finally, the results also show a positive correlation between product and labor market imperfections, indicating that they should be tackled together.

Click here to go to the paper by Carlos Figueira and Ricardo Pinheiro-Alves.