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In South Africa, 5 percent of the firms in the manufacturing sector account for over half the industry output (Fedderke and Szalontai, 2004).
Aghion et al. (2008) found that the profitability margins in South Africa’s manufacturing sector are, on average, more than twice compared to other countries, and they are associated with the relatively low productivity and growth. Fedderke et al. (2006) showed that the industry concentration in South Africa exerts a positive influence on the price-cost markups.
The long-term correlation (1980-2009) between the change in non-fuel commodity prices and the output gap is relatively weak (0.05). The correlation between the output gap and the change in fuel price index is 0.36.
In imperfect product markets, the demand for labor will be a function of the markup. Consequently, counter-cyclical markups imply that, in economic booms (downturns), the labor demand will shift up (down) and result in higher (lower) equilibrium of real wage. For further discussion, see NBER Macroeconomics Annual 1991, pp. 63–129.
Rearrangement of equation (4) gives:
The expected real rate is derived from the yields on government bonds with maturities of 15 years, and inflation expectations, which are computed on the basis of Hodrick-Prescott filter for inflation rate. The price of capital stock is derived from the price of fixed capital formation.
Given that the Labor Force Survey (LFS) was introduced in 2000, the data for employment in the agricultural sector is not available for earlier years.
The markup gap aims to look at the cyclical component of the markup and exclude the changes in the markup’s trend that can be attributed to structural changes in the product markets.
The estimation does not show evidence for an asymmetric response of the markup gap to the output gap.
The VAR estimations include three exogenous variables: the cyclical component of the world GDP, World_Cyc, to control for global business cycles, the cyclical component of world inflation, World_Inf_Cyc, to reflect the variation in commodity prices, and a dummy for outliers in inflation in South Africa, DUMINF, which reflects observations in which inflation moved by one standard deviation or more within one quarter.
The coefficient of the second lag of the output gap is positive but it is not significantly different from zero.
The shocks in the VAR were orthogonized using Cholesky decomposition. Although in this specification, the output gap was considered as the most exogenous variable and inflation as the least exogenous variable, a change in the ordering did not change the main results.