Wage councils, product markups and wage markdowns: Evidence from Uruguay

Abstract

In 2005, after a leftist coalition won the national election for the first time, Uruguay returned to sector-level wage bargaining councils with active government participation. We estimate product markups and wage markdowns using firm-level data for the period 2002–2016, and report decreasing wage markdowns and increasing -to a lesser extent- firm-level product markups. We find statistically significant impacts of minimum mandated wages on product markups and wage markdowns, and additional effects of unions on wage markdowns. The evidence suggests that firms operate in monopsonistic labor markets. Though their bargaining power in the labor market was reduced over time as a result of wage councils, firms were able to pass a sizable part of the increases in labor costs to consumers.