Effects of Costs, Demand, and Labor Productivity on the Prices of Forest Products in the United States, 1958-1984

Abstract

Abstract The objective of this study was to investigate the reasons for changes in the prices of forest products. To do this, a mark-up model of price formation was proposed. It linked yearly price changes to changes in variable costs and changes in demand. This model was estimated with annual data on prices, variable costs, and inventory-output ratios, from 1958 to 1984. Four solidwood industries and three pulp and paper industries of the United States were studied. The results showed that, depending on the industry, the theory explained 83 to 98% of the variation in annual price changes. Rises and declines of variable costs had symmetric effects on prices, except for pulp mills, the most concentrated industry, in which downward-price inflexibility was apparent. Decomposition analysis showed that over the interval 1958-1984, the rise in variable costs explained most of the rise in product prices. Further decomposition indicated that within variable costs, increases in material costs led to increases in prices that were much higher than those due to labor costs. Finally, in no industry did the increase in labor productivity between 1958 and 1984 compensate for the rise in the wage rate, so that increases in wages also contributed to the general inflation in forest product prices. To improve their competitiveness, the forest products industries should strive to control material costs and increase their labor productivity. For. Sci. 35(2):349-363.