The markup (the ratio of price to marginal cost) in Canada has risen steadily since the early 1990s suggesting a widening gap between the actual and the efficient level of output and a declining share of labour income in GDP. It exhibits non-stationary movements over the sample period 1982Q1 to 2009Q4, allowing us to identify a permanent markup shock. We provide evidence that oil price movements are important for understanding the behaviour of the markup, and separately identify both oil price shocks and permanent non-oil markup shocks. Our key findings are: (1) oil price shocks and non-oil markup shocks account for 50 to 80 percent of the variation in the markup, with the former dominating at shorter horizons; (2) the role of oil price shocks is prominent in accounting for the upward trend in the markup since the mid-1990s; (3) the direct effects of oil prices on the markup in the mining sector (which includes the oil-producing sector) have contributed the most to the upward trend in the aggregate markup; and (4) other explanations such as market structure shifts, trend inflation movements and the falling relative price of investment do not appear to account for the behaviour of the markup.

Additional Metadata
Keywords Permanent markup shocks, Oil prices, Market structure, Declining labour income share
JEL Price Level; Inflation; Deflation (jel E31), Business Fluctuations; Cycles (jel E32)
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Khan, H.U, & Kim, Bae-Geun. (2012). Markups and Oil Prices in Canada (No. CEP 11-06). Carleton Economic Papers. Department of Economics.