Shape matters: cost curves and capacity utilization in U.S. manufacturing

Abstract

This study investigates the shape of cost curves and cost components of twenty industries in the U.S. manufacturing sector in the 1958–2010 period. After aggregating data for the 459 industries of the U.S. Standard Industrial Classification (SIC), I analyzed, at both sectoral and two-digit levels, the behavior of unit variable costs for different levels of output, as represented by a proxy for capacity utilization. In addition, I decomposed the cost structure into payroll, wages, and material costs. Results show that the unit variable costs of the large majority of industries present constancy around the trend of the output series, giving support therefore to the hypothesis of a post-Keynesian inverted L-shaped cost curve that, at the aggregate level, shows a considerable range of constancy in unit direct cost curves around normal capacity utilization. In addition, decomposition in material and labor costs shows that labor hoarding is a generalized phenomenon in the manufacturing sector, shown by the steeper slopes of the local regression fits for payroll and wage costs in relation to material costs.