Do wages squeeze markups? Sectoral-level evidence for Brazil, 2000-2013

This paper aims to empirically investigate the relationship between sectoral unit labor costs and markups for the Brazilian economy from 2000 to 2013. The underlying hypothesis is that labor costs are the sole determinant of a firm's competitiveness, a notion that has been widely accepted as conventional wisdom despite the lack of empirical evidence. Our analysis of the Brazilian economy does not provide evidence that the rises in wages squeezed markup rates over this period. Conversely, our study suggests that the compression of markups was influenced by a set of factors, including the costs of service sector inputs, stagnating labor productivity, and international trade pressure. Therefore, our study highlights the need for a more nuanced understanding of the relationship between unit labor costs and markups by shedding some light on the asymmetric impact of different sources of cost pressures and competition on sectoral markups in the Brazilian economy.