The Determination of Profit Margins in UK Manufacturing

Abstract

This paper examines the determinants of profit margins in 90 UK manufacturing industries over the period 1983-86. It considers how the inclusion of labour market characteristics in empirical Industrial Organisation specifications affects the estimated concentration--margins relationship. The empirical work pays detailed attention to the endogenous nature of variables derived from structural Industrial Organisation models. We report instrumental variables estimates of margins equations in which there emerges a significant role for labour market characteristics. Indeed, both unionisation and industry-wide unemployment are found to depress profit margins. The impact of concentration is seen to be biased downwards when these variables are omitted.