Sectoral Mark-ups and Their Determinants in Brazilian Manufacturing

This study argues that the sectoral mark-up is adjusted countercyclically over the business cycle. This occurs due to the microeconomic behavior of manufacturing sectors that target their mark-up rate as a function of the larger the difference between the effective profit rate and the desired profit rate due to lower values of demand than the expected one. Such behavior results from a mechanism designed to obtain the desired profit rate when sales are reduced, which leads to macroeconomic consequences by transferring income to these sectors. Our article empirically investigates the determinants of mark-up in 96 sectors in Brazil’s manufacturing industry between 2014 and 2022. The work has several original contributions. First, a disaggregated database is employed for this purpose in line with Lavoie (2024). Second, the article's empirical findings indicate an inverse relationship between labor costs and mark-up rate. Third, reduced volume of sales, by increasing the unsold products, leads the firms to increase their mark-up rates to compensate for a decline in sales volume and maintain their profits, which confirms our theoretical argument. Fourth, our empirical findings are helpful to explain the mark-up behavior during the COVID-19 pandemic, marked by an upsurge in many sectors despite the accumulation of unsold products.