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Prepared by Yuko Kinoshita.
For empirical analysis, we use the aggregate price level rather than the price of services due to paucity of the appropriate data.
We measure the weakness/strength of foreign competition for country i as the log of the ratio of an index of export prices of EU countries excluding country i to the country’s price level, GVADi. Labor share is given by SL=WN/PY, where W is labor cost per employee, N is employment, P is the GDP deflator at factor cost, and Y is national income. SL is net of indirect taxes. Finally, wage dispersion is defined as the ratio of the median wage and the lowest-paid workers’ wage from OECD Employment Outlook.
The output gap reflects cyclical factors that affect the price level. Output gap shows a negative (though not statistically significant) coefficient, indicating a degree of counter-cyclicality in the equilibrium markup: when the economy is booming, firms are more likely to cut the price level to get a larger market share.