Margins, concentration, unions and the business cycle: Theory and evidence for Britain

A number of recent studies have examined the cyclical relationship between price-cost margins, concentration and unions. U.S. data has concluded that unions reduce margins; margins vary over the cycle; and concentration, unionisation and the cycle interact in their effect on margins. However, there is almost no theory to account for these results. We propose a simple theory that assumes only that there is overhead labour present at the firm. This produces theoretical predictions that can explain these results, and discriminate between existing theories. We present results of our own using U.K. panel data, and show similar findings to the U.S.