<p>My reading is yes, it is procyclical in levels and margins. </p>

<blockquote>
  <p>This paper uses industry and firm data to look at price cost mark-ups
  and firm profit margins in U.K. manufacturing and services. In
  particular it examines how they behave over the business cycle. It has
  two main findings. First, the estimated average mark-ups and the
  profit margin results both suggest that there is imperfect competition
  in manufacturing and services. Second, <strong>mark-ups are pro-cyclical, as
  are profit margins</strong> even after allowing for movements in their standard
  determinants. This suggests that price pressures may increase during
  recovery periods and decrease during recessions. One possible
  explanation for this is Kreps and Scheinkman's argument that the
  pro-cyclicality of capacity constraints means that firms move between
  Cournot and Bertrand competition over the cycle. The finding that
  mark-ups are pro-cyclical also raises doubts about macroeconomic
  models that assume that demand shocks may affect employment via
  counter-cyclical mark-ups.</p>
</blockquote>

<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115037" rel="nofollow">The Cyclicality of Mark-Ups and Profit Margins: Some Evidence for Manufacturing and Services</a> </p>

<blockquote>
  <p>In this paper, we assess the cyclicality of mark-ups and profit
  margins within the United Kingdom, at both the aggregate and industry
  level. We find that the <strong>private sector labour share moves
  countercyclically, suggesting that the aggregate mark-up moves
  procyclically</strong>. This result survives when we consider more
  sophisticated measures of the mark-up. And this result is also
  supported by industry-level data. We find that the <strong>aggregate market
  sector profit share moves procyclically and that the cyclical
  behaviour of profit margins</strong> is largely homogenous across industries.
  Nevertheless, there is some evidence that margins moved against the
  cycle in the late 1990s, starting to fall in 1997, whereas GDP growth
  did not peak until 2000. In tandem with these cyclical movements, we
  also find that the market sector profit share has trended upwards
  since 1970, in contrast to the aggregate mark-up, which fell over the
  same period.</p>
</blockquote>

<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1280900" rel="nofollow">The Cyclicality of Mark-Ups and Profit Margins for the United Kingdom: Some New Evidence</a> </p>

<blockquote>
  <p>Modeling cash flows separately from aggregate consumption is crucial
  since corporate cash flows have historically been far more volatile
  and sensitive to economic shocks than has aggregate consumption. For
  example, <strong>corporate earnings have been more than ten times as volatile
  as consumption growth during the post-war period. Similarly, while
  aggregate consumption declined nearly 10 percent during the early
  stages of the Great Depression, aggregate corporate earnings were
  completely obliterated as they fell more than 103 percent.</strong> In addition
  to being more volatile, <strong>corporate cash flows are also highly
  correlated with aggregate consumption because of their strong
  procyclical behavior.</strong> To provide specifics, during the 1929 to 2001
  period the volatility of earnings growth was 29.5 percent, while the
  correlation between per capita real consumption and earning growth was
  68.7 percent.</p>
  
  <p>Intuitively, <strong>the reason for the extreme volatility and procyclicality
  of corporate earnings is that stockholders are residual claimants to
  corporate cash flows. Thus, the compensation of workers is a senior
  claim to cash flows. In other words, labor contracts provide workers
  with some degree of insurance against business cycle risk.</strong> These
  contracts make the fraction of labor income in output (or consumption)
  countercyclical, while the fraction of earnings in output is
  procyclical. <strong>Gomme and Greenwood (1995) document that these
  business-cycle-related changes in labor income and earnings can be
  found in many countries.</strong>
  <a href="http://core.ac.uk/download/pdf/6743530.pdf" rel="nofollow">CORPORATE EARNINGS AND THE EQUITY PREMIUM</a> </p>
</blockquote>

<p>Finally,
<a href="http://www.jeremygreenwood.net/papers/gg95.pdf" rel="nofollow">On the cyclical allocation of risk</a> P.117 shows that Labor’s share of income (in Australia, Austria, Britain, Canada, France, Germany, Japan, and the USA) is negatively contemporaneously correlated with the seasonal component of aggregate income, suggesting that when aggregate income is high profit margins are high.  </p>

CC BY-SA 3.0
2015-02-04T17:30:04.300Z
Do I understand the last one correctly? For those countries, the labor share is counter cyclical. Assuming capital share of income is not pro cyclical, this means that profits must be?
FooBar
CC BY-SA 3.0
2015-02-04T18:49:33.043Z
I think it depends on what you mean by "profits". If you include interest in your definition of profits (something like EBITDA) then capital share is essentially profits.
BKay
CC BY-SA 3.0
2015-02-03T00:06:52.770Z
2015-02-03T00:15:06.367Z
2015-02-03T00:15:06.367Z
BKay
<p>This is somewhat related, but distinct from <a href="https://economics.stackexchange.com/questions/3248/cyclicality-of-markups">Cyclicality of Markups</a></p>

<p>Basically, I'm looking for papers on whether firms profits are (on average) procyclical or not, and I appreciate theoretical, but look mainly for empirical papers.</p>

<macroeconomics><reference-request><business-cycles><empirical-evidence><profits>
Are profits procyclical?
FooBar
# Are profits procyclical?

(Asked by: username_0 on 2015-02-02)

This is somewhat related, but distinct from [Cyclicality of Markups](https://economics.stackexchange.com/questions/3248/cyclicality-of-markups)

Basically, I'm looking for papers on whether firms profits are (on average) procyclical or not, and I appreciate theoretical, but look mainly for empirical papers.

**Tags:** macroeconomics, reference-request, business-cycles, empirical-evidence, profits

---

## 1 answers

### Answer by username_1 on 2015-02-03. Score: 2

My reading is yes, it is procyclical in levels and margins.

> This paper uses industry and firm data to look at price cost mark-ups
> and firm profit margins in U.K. manufacturing and services. In
> particular it examines how they behave over the business cycle. It has
> two main findings. First, the estimated average mark-ups and the
> profit margin results both suggest that there is imperfect competition
> in manufacturing and services. Second, **mark-ups are pro-cyclical, as
> are profit margins** even after allowing for movements in their standard
> determinants. This suggests that price pressures may increase during
> recovery periods and decrease during recessions. One possible
> explanation for this is Kreps and Scheinkman's argument that the
> pro-cyclicality of capacity constraints means that firms move between
> Cournot and Bertrand competition over the cycle. The finding that
> mark-ups are pro-cyclical also raises doubts about macroeconomic
> models that assume that demand shocks may affect employment via
> counter-cyclical mark-ups.

[The Cyclicality of Mark-Ups and Profit Margins: Some Evidence for Manufacturing and Services](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115037)

> In this paper, we assess the cyclicality of mark-ups and profit
> margins within the United Kingdom, at both the aggregate and industry
> level. We find that the **private sector labour share moves
> countercyclically, suggesting that the aggregate mark-up moves
> procyclically**. This result survives when we consider more
> sophisticated measures of the mark-up. And this result is also
> supported by industry-level data. We find that the **aggregate market
> sector profit share moves procyclically and that the cyclical
> behaviour of profit margins** is largely homogenous across industries.
> Nevertheless, there is some evidence that margins moved against the
> cycle in the late 1990s, starting to fall in 1997, whereas GDP growth
> did not peak until 2000. In tandem with these cyclical movements, we
> also find that the market sector profit share has trended upwards
> since 1970, in contrast to the aggregate mark-up, which fell over the
> same period.

[The Cyclicality of Mark-Ups and Profit Margins for the United Kingdom: Some New Evidence](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1280900)

> Modeling cash flows separately from aggregate consumption is crucial
> since corporate cash flows have historically been far more volatile
> and sensitive to economic shocks than has aggregate consumption. For
> example, **corporate earnings have been more than ten times as volatile
> as consumption growth during the post-war period. Similarly, while
> aggregate consumption declined nearly 10 percent during the early
> stages of the Great Depression, aggregate corporate earnings were
> completely obliterated as they fell more than 103 percent.** In addition
> to being more volatile, **corporate cash flows are also highly
> correlated with aggregate consumption because of their strong
> procyclical behavior.** To provide specifics, during the 1929 to 2001
> period the volatility of earnings growth was 29.5 percent, while the
> correlation between per capita real consumption and earning growth was
> 68.7 percent.
>
> Intuitively, **the reason for the extreme volatility and procyclicality
> of corporate earnings is that stockholders are residual claimants to
> corporate cash flows. Thus, the compensation of workers is a senior
> claim to cash flows. In other words, labor contracts provide workers
> with some degree of insurance against business cycle risk.** These
> contracts make the fraction of labor income in output (or consumption)
> countercyclical, while the fraction of earnings in output is
> procyclical. **Gomme and Greenwood (1995) document that these
> business-cycle-related changes in labor income and earnings can be
> found in many countries.**
> [CORPORATE EARNINGS AND THE EQUITY PREMIUM](http://core.ac.uk/download/pdf/6743530.pdf)

Finally,
[On the cyclical allocation of risk](http://www.jeremygreenwood.net/papers/gg95.pdf) P.117 shows that Labor’s share of income (in Australia, Austria, Britain, Canada, France, Germany, Japan, and the USA) is negatively contemporaneously correlated with the seasonal component of aggregate income, suggesting that when aggregate income is high profit margins are high.

> **Comments:**
> **username_0**: Do I understand the last one correctly? For those countries, the labor share is counter cyclical. Assuming capital share of income is not pro cyclical, this means that profits must be?  
> **username_1**: I think it depends on what you mean by "profits". If you include interest in your definition of profits (something like EBITDA) then capital share is essentially profits.  

---

