Estimating the Cyclicality of Marginal Costs Directly

Abstract

This paper studies the cyclical behavior of marginal costs by examining changes in a constructed measure of total costs in response to changes in output. The main result is that marginal costs in U.S. manufacturing appear close to constant at annual frequency. this conclusion contrasts with previous work that has found marginal costs to be strongly procyclical. the finding of non-increasing marginal cost is robust to considerations of various types of bias, and issues of cyclical measurement error. The methodology of the paper is shown to be valid under different assumptions about economic behaviour such as labor hoarding, increasing marginal prices of inputs, and the existence of fixed costs of production. The results do not support the hypothesis that marginal costs are constant over the business cycle because of large productive spillovers in manufacturing that are external at the two-digit level.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100976/1/ECON041.pd