Working Paper: NBER ID: w1785
Authors: Robert E. Hall
Abstract: An examination of data on labor input and the quantity of output reveals that most U.S. industries have marginal costs far below their prices. The corilusion rests on the empirical finding that cyclical variations in labor input are small compared to variations in output. In booms, firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs. The paper documents the disparity between price and marginal cost,where marginal cost is estimated from variations in cost from one year to the next. It considers a wide variety of explanations of the flndings that are consistent with competition, but none is found to be plausible.
Keywords: price; marginal cost; U.S. industry; economic fluctuations; competitive markets
JEL Codes: D21; D24; L11; L12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output variations (C67) | marginal costs (D40) |
| price (D41) | marginal costs (D40) |
| marginal cost = price (D41) | total manufacturing (L60) |
| cyclical measurement errors in wages (J31) | price-marginal cost disparities (D40) |
| adjustment costs (J30) | price-marginal cost disparities (D40) |
| price rigidity (D41) | price-marginal cost disparities (D40) |
| increasing returns to scale (O40) | price-marginal cost discrepancies (D40) |
| constant returns (D41) | price-marginal cost relationship (D40) |