The Cyclical Behavior of Marginal Cost and Price

Abstract

The author examines the cyclical behavior of price/marginal cost margins for U.S. manufac turing after 1956. Short-run marginal cost is markedly procyclical. This is primarily due to procyclical overtime payments, incurred beca use employment is not perfectly flexible. In most industries, output price fails to respond to the cyclical movement in marginal cost; so price/marginal cost margins are markedly countercyclical. The res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing; they support theories that explain low production in a recession by the inability of firms to sell their output. Copyright 1987 by American Economic Association.

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