MACROECONOMIC DYNAMICS AND THE ROLE OF MARKET POWER. THE CASE OF ITALY

  • Jasmine MONDOLO Polytechnic University of the Marche, Italy

Abstract

In recent years, the US and other advanced countries have experienced macroeconomic dynamics which raise some concerns and which, according to the literature, are at least partly attributable to a rise in product market power. This study mainly aims to understand how Italy performs in terms of five relevant economic variables (i.e., domestic investment rate, labour share, labour force participation, wage inequality and economic dynamism), and whether firms’ markups are on the rise. The picture that emerges is mixed, and the negative performance in terms of business dynamism and wage dispersion may be ascribable to an increase in product market power. The firm-level analysis of the Italian manufacturing sector for the years 2011-2018, which complements previous empirical analysis on product market power in this country and accounts for labour market power as well, reveals an increment in the average markup which, however, is not particularly pronounced and unsettling, and which is preceded by a period of steady decline. Moreover, this trend is accompanied by a more remarkable increase in the workers’ labour market power, which helps explain the modest growth in the revenue-based labour share observed during the same period.

References

[1] Ackerberg, D.A., Caves, K. and Frazer, G. 2015. Identification Properties of Recent Production Function Estimators. Econometrica, 83(6): 2411-2451. DOI: https://doi.org/10.3982/ECTA13408
[2] Armenter, R. 2015. A bit of a miracle no more: the decline of the labour share. Business Review, Q3: 1-9. https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/2015/q3/brq315_a_bit_of_a_miracle_no_more.pdf
[3] Armijos, M. and Cuenca, G. 2021. Market Power influence on the Suboptimal levels of Investment: Evidence from Ecuador. X-Pedientes Económicos, 5(12): 6-16. http://portal.amelica.org/ameli/journal/392/3922449001/3922449001.pdf
[4] Atkinson, A. and Piketty, T. 2009. Top Incomes in the Twentieth Century. Vol. II, Oxford University Press: Oxford, UK.
[5] Autor, D., et al. 2020. The Fall of the Labour Share and the Rise of Superstar Firms. The Quarterly Journal of Economics, 135(2): 645-709. DOI: https://doi.org/10.1093/qje/qjaa004
[6] Barkai, S. 2020. Declining Labour and Capital Shares. The Journal of Finance, 75(5): 2421-2463.
[7] Bassanetti, A., Torrini, R. and Zollino, F. 201*. Changing institutions in the European market: the impact on mark-ups and rents allocation. Banca d'Italia Working Papers, Working Paper No. 781. https://www.bancaditalia.it/pubblicazioni/temi-discussione/2010/2010-0781/en_tema_781.pdf
[8] Basu, S. 2019*. Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence. Journal of Economic Perspectives, 33(3): 3-22. DOI: 10.1257/jep.33.3.3
[9] Bental, B. and Demougin, D. 2010. Declining Labour Shares and Bargaining Power: An Institutional Explanation. Journal of Macroeconomics, 32(1): 443-456. DOI:https://doi.org/10.1016/j.jmacro.2009.09.005
[10] Buccirossi, P., et al. 2013. Competition Policy and Productivity Growth: An Empirical Assessment. The Review of Economics and Statistics, 95(4): 1324-1336. Available at: https://www.eief.it/files/2013/10/spagnolo-e-altri_res_2013.pdf
[11] Bugamelli, M., Fabiani, S. and Sette, E. 2015. The Age of the Dragon: the Effect of Imports from China on Firm-Level Prices. Journal of Money, Credit and Banking, 47: 1091-1118. DOI:https://doi.org/10.1111/jmcb.12238
[12] Bugamelli, M., Schivardi, F. and Zizza, R. 2008. The Euro and Firm Restructuring, NBER Working Papers, Working Paper No.14454. Available at: http://www.nber.org/papers/w14454
[13] Cefis, E. and Gabriele, R. 2009. Spatial disaggregation patterns and structural determinants of job flows: an empirical analysis. International Review of Applied Economics, 23(1): 89-111.
[14] Cette, G., Koehl, L. and Philippon, T. 2019. Labour shares in some advanced countries. NBER Working Papers, Working Paper No. 26136. Available at: http://www.nber.org/papers/w26136
[15] Comanor, W.S. and Smiley, R.H. 1975. Monopoly and the Distribution of Wealth. The Quarterly Journal of Economics, 89(2): 177-194. DOI: 10.2307/1884423
[16] Crafts, N. and Mills, T. C. 2005*. TFP Growth in British and German Manufacturing, 1950-1996. The Economic Journal, 115: 649-670. Available at: https://www.jstor.org/stable/3590451
[17] Dall’Aglio, V., Magnani, M. and Marchini, P. L. 2015. A Firm-level Analysis of the Italian Labour Share. Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell 'Universita' Cattolica del Sacro Cuore, 129(2): 179-210.
[18] De Loecker, J. and Eeckhout, J. 2018. Global Market Power. NBER Working Papers, Working Paper No. 24768. DOI: 10.3386/w24768
[19] De Loecker, J. and Warzynski, F. 2012. Markups and Firm-Level Export Status. American Economic Review, 102(6): 2437-2471. DOI: 10.1257/aer.102.6.2437
[20] De Loecker, J., Eeckhout. J. and Unger, G. 2020. The Rise of Market Power and the Macroeconomic Implications. The Quarterly Journal of Economics, 135(2): 561-644. Available at: https://www.janeeckhout.com/wp-content/uploads/26.pdf
[21] De Philippis, M. 2017. The dynamics of the Italian labour force participation rate: determinants and implications for the employment and unemployment rate. Banca d’Italia Questioni di Economia e Finanza, Occasional Paper No. 396. Available at: https://www.bancaditalia.it/pubblicazioni/qef/2017-0396/QEF_396_17.pdf
[22] Decker, R., Haltiwanger, J., Jarmin, R.S. and Miranda, J. 2014. The secular decline in business dynamism in the US. University of Maryland, Mimeo.
[23] Diez, F.J., Leigh, D. and Tambunlertchai, S. 2018. Global Market Power and its Macroeconomic Implications. IMF Working Papers, WP/18/137. Available at: https://www.imf.org/en/Publications/WP/Issues/2018/06/15/Global-Market-Power-and-its-Macroeconomic-Implications-45975
[24] Dixon, R. and Lim, G. 2020. Is the decline in labour’s share in the US driven by changes in technology and/or market power? An empirical analysis. Applied Economics, 52(59): 6400-6415. DOI:10.1080/00036846.2020.1795072
[25] Dobbelaere, S. and Mairesse, J. 2013. Panel data estimates of the production function and product and labour market imperfections. Journal of Applied Econometrics, 28(1): 1-46. DOI:https://doi.org/10.1002/jae.1256
[26] Domowitz, I., Hubbard, R. G. and Petersen, B C. 1988*. Market Structure and Cyclical Fluctuations in U.S. Manufacturing. Review of Economics and Statistics, 70(1): 55-66. DOI:https://doi.org/10.2307/1928150
[27] Eggertsson, G.B., Robbins, J.A. and Wold, E.G. 2018. Kaldor and Piketty's facts: The rise of monopoly power in the United States. NBER Working Papers, Working Paper No. 24287.
[28] Elsby, M. W. L., Hobijn, B and Sahin, A. 2013. The Decline of the U.S. Labour Share. Brookings Papers on Economic Activity, 2: 1-63. Available at: https://www.brookings.edu/wp-content/uploads/2016/07/2013b_elsby_labor_share.pdf
[29] Ennis, S.F. and Kim, Y. 2016. Market Power and Wealth Distribution. In A Step Ahead: Competition Policy. Shared Prosperity and Inclusive Growth. World Bank Publishing, 133-153.
[30] Ennis, S.F., Gonzaga, P. and Pike, C. 2019. Inequality: A Hidden Cost of Market Power. Oxford Review of Economic Policy, 3(3): 518-549.
[31] Forni, L., Gerali, A. and Pisani, M. 2014. Macroeconomic effects of greater competition in the service sector: the case of Italy. Banca d’Italia Temi di Discussione (Working Papers), Working Paper No. 706.
[32] Furman, J. 2018. Testimony to Hearing on ‘Market Concentration’. Testimony before the Organisation for Economic Co-operation and Development, (OECD), June 7, 2018.
[33] Gans, J., Leigh, A., Schmalz, M. and Triggs, A. 2019. Inequality and Market Concentration, when Shareholding is More skewed than Consumption. Oxford Review of Economic Policy, 35(3): 550-563. DOI: https://doi.org/10.1093/oxrep/grz011
[34] Giordano, C. and Zollino, F. 2017. Macroeconomic estimates of Italy’s mark-ups in the long-run, 1861-2012. Banca d’Italia Economic History Working Papers, Working Paper No. 39.
[35] Gutièrrez, G and Philippon, T. 2017. Investmentless Growth: An Empirical Investigation. Brookings Papers on Economic Activity, Fall 2017: 89-169.
[36] Gutièrrez, G. 2018. Investigating Global Labour and Profit Shares. Society for Economic Dynamics’ s 2018 Meeting Papers, Meeting Paper No. 165. Available at: https://economicdynamics.org/meetpapers/2018/paper_165.pdf
[37] Gutièrrez, G. and Piton, S. 2020. Revisiting the global decline of the (non-housing) labour share. American Economic Review: Insights, 2(3): 321-338. Available at: http://germangutierrezg.com/GutierrezPiton2020_AERI_LaborShares.pdf
[38] Han, M. 2014. Rising Income Inequality and Competition: Evidence. KIEP Research Papers, Working Paper No. 14-03. DOI: http://dx.doi.org/10.2139/ssrn.2634311
[39] Han, M. and Pyun, J.H. 2021. Markups and income inequality: Causal links, 1975-2011. Journal of Comparative Economics, 49: 290-312. DOI: https://doi.org/10.1016/j.jce.2020.12.002
[40] Kaldor, N. 1957. A model of economic growth. Economic Journal, 67: 591-624.
[41] Karabarbounis, L. and Neiman, B. 2014. The Global Decline of the Labour Share. Quarterly Journal of Economics, 129(1): 61-103. DOI: https://doi.org/10.1093/qje/qjt032
[42] Karabarbounis, L. and Neiman, B. 2018. Accounting for Factorless Income. NBER Working Papers, Working Paper No. 24404. https://www.nber.org/system/files/working_papers/w24404/w24404.pdf
[43] Khan, L. and Vaheesan, S. 2017. Market Power and Inequality: The Antitrust Counterrevolution and Its Discontents. Harvard Law and Policy Review, 11: 235-294. Available at: https://harvardlpr.com/wp-content/uploads/sites/20/2017/02/HLP110.pdf
[44] Klette, T.J. 1999*. Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data. Journal of Industrial Economics, 47(4): 451-476. DOI:https://doi.org/10.1111/1467-6451.00108
[45] Koh, D., Santaeulàlia-Llopis, R. and Zheng, Y. 2020. Labour Share Decline and Intellectual Property Products Capital. Econometrica, 88(6): 2609-2628. DOI: https://doi.org/10.3982/ECTA17477
[46] Levinsohn, J. and Petrin, A. 2003*. Estimating Production Functions Using Inputs to Control for Unobservables. The Review of Economic Studies, 70(2): 317-341. DOI: 10.1111/1467-937X.00246
[47] Manyika, J., et al. 2019. A new look at the declining labour share of income in the United States. McKinsey Global Institute Discussion paper, May 2019.
[48] Mertens, M. 2019. Micro-mechanisms behind declining labour shares: Market power, production processes, and global competition. IWH-CompNet Discussion Papers, Working Paper 3/2019, Halle Institute for Economic Research (IWH). http://hdl.handle.net/10419/193167
[49] Mondolo, J. 2020. Macro and microeconomic evidence on investment, factor shares, firm and labor dynamics in Italy and in Trentino. SIS Working Papers, Working Paper No. 2020–2, School of International Studies (SIS), University of Trento. Available at: https://mpra.ub.uni-muenchen.de/99138/1/MPRA_paper_99138.pdf
[50] Nolan, B., Richiardi, M.G. and Valenzuela, L. 2019. The drivers of income inequality in rich countries. Journal of Economic Surveys, 33(4): 1285-1324.
[51] Olley, S. and Pakes, A. 1996*. The dynamics of productivity in the telecommunications equipment industry. Econometrica, 64: 1263-1297. DOI: https://doi.org/10.2307/2171831
[52] Perugini, C., Vecchi, M. and Venturini, F. 2017. Globalisation and the decline of the labour share: A microeconomic Perspective. Economic Systems, 41: 524-536. DOI:https://doi.org/10.1016/j.ecosys.2017.08.002
[53] Petrin, A. and Levinsohn, J. 2012*. Measuring aggregate productivity growth using plant-level data. RAND Journal of Economics, 43(4): 705-725. DOI:https://doi.org/10.1111/1756-2171.12005
[54] Rognlie, M. 2015. Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity? Brookings Papers on Economic Activity, 1: 1-69. https://www.brookings.edu/wp-content/uploads/2016/07/2015a_rognlie.pdf
[55] Schwellnus, C., Kappeler, A. and Pionnier, P. A. 2017. Decoupling of wages from productivity: Macro-level facts. OECD Economics Department Working Paper No. 1373. https://www.oecd.org/social/labour/Decoupling-of-wages-from-productivity-Macro-level-facts.pdf
[56] Schwellnus, C., Pak, M., Pionnier, P-A. and Crivellaro, E. 2018. Labour share developments over the past two decades: the role of technological progress, globalisation and “winner-takes-most” dynamics. OECD Economics Department Working Paper No. 1503. https://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP(2018)51&docLanguage=En
[57] Sun, X., Yuan, F. and Wang, Y. 2021. Market power and R&D investment: the case of China. Industrial and Corporate Change, 2021: 1-17. DOI: https://doi.org/10.1093/icc/dtab015
[58] Torrini, R. 2016. Labour, profit and housing rent shares in Italian GDP: long-run trends and recent patterns. Banca d’Italia Questioni di Economia e Finanza, Occasional paper No. 318.
[59] Wooldridge, J. 2009*. On estimating firm-level production functions using proxy variables to control for unobservables. Economic Letters, 104(3). DOI:https://doi.org/10.1016/j.econlet.2009.04.026
[60] Yilmaz, E. and Kaplan, Z. 2021. Heterogeneity of market power: firm‑level evidence. Economic Change and Restructuring. DOI: https://doi.org/10.1007/s10644-021-09350-8
[61] Zac, A., Casti, C., Decker, C. and Ezrachi, A. 2021. Competition policy and the decline of the labour share. Centre for Competition Law and Policy’s Working papers, CCLP(L)54, University of Oxford.
[62] CEA 2016. Benefits of competition and indicators of market power. Issue Brief. Council of Economic Advisers. Available at: https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160414_cea_competition_issue_brief.pdf
[63] ECB 2019. Concentration, market power and dynamism in the euro area. ECB Working Paper Series, Working Paper No. 2253.
[64] IMF (International Monetary Fund, 2019). World Economic Outlook, April 2019. Growth Slowdown, Precarious Recovery. Washington, DC.
Published
2022-12-31
How to Cite
MONDOLO, Jasmine. MACROECONOMIC DYNAMICS AND THE ROLE OF MARKET POWER. THE CASE OF ITALY. Theoretical and Practical Research in the Economic Fields, [S.l.], v. 13, n. 2, p. 130 - 155, dec. 2022. ISSN 2068-7710. Available at: <https://journals.aserspublishing.eu/tpref/article/view/7467>. Date accessed: 08 feb. 2023. doi: https://doi.org/10.14505/tpref.v13.2(26).03.