Review of Industrial Organization
13: 543–556, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Empirical Evidence on the Relationship between Labour Demand
Flexibility and Proﬁt Margins
Austrian Institute of Economic Research, P.O. Box 91, A-1103 Vienna, Austria
CHRISTOPH R. WEISS
Department of Economics, University of Linz, A-4040 Linz, Austria
Abstract. This paper addresses the determinants of price-cost margins in U.S. 4-digit industries.
Margins are larger in capital intensive and concentrated industries with high growth rates and R&D
and advertising to sales ratios. They also ﬂuctuate signiﬁcantly over the business cycle. We go beyond
the existing literature by considering an issue which is a dominant topic in the business literature,
the ﬂexibility of ﬁrms to adjust to exogenous shocks. In particular, we ﬁnd a signiﬁcant positive
relationship between the ﬂexibility of labour demand and price cost margins suggesting that it pays
to be ﬂexible.
Key words: Price-cost margins, manufacturing industries, ﬂexibility.
Industry proﬁt margins are typically analysedin a staticframework.A givennumber
of ﬁrms in an industry is assumed to maximise proﬁts by choosing output (or
prices) implying a positive relationship between industry proﬁt margins and market
concentration. Dynamic aspects and/or the speciﬁc character of production factors,
such as the fact that some factors can be adjusted more quickly than others, are
not considered explicitly. In this respect, this approach does not pay attention to an
issue which, over the last years, has been one of the dominant themes of business
pages in newspapersand magazines,the need for ﬁrms to be ﬂexible. “Judging from
the business literature, ﬂexibility would seem to be as important a determinant of
international competitiveness as costs” (Carlsson, 1989, p. 180).
We would like to thank Paul Geroski, Michael Pfaffermayr and an anonymous journal referee
for helpful comments on an earlier version of this paper.