Wage and price setting: new evidence from Uruguayan firms

Fernando Borraz,Gerardo Licandro,Daniela Sola

doi:10.1080/15140326.2020.1805713

Fernando Borraz, Gerardo Licandro + Show 1 more

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https://doi.org/10.1080/15140326.2020.1805713

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Abstract

ABSTRACT This paper presents new evidence on wage and price setting based on a survey of more than 300 Uruguayan firms in 2013. Most of the firms set prices considering costs and adding a profit margin; therefore, they have some degree of market power. The evidence indicates that price increases appear quite flexible in Uruguay (prices are downward rigid). Most of the firms adjust their prices on an irregular basis, which suggests that price changes in Uruguay are state-dependent, although wage changes are concentrated in January and July. Interestingly, the cost of credit is seen as an irrelevant factor in explaining price increases. We also find that cost reduction is the principal strategy to a negative demand shock, and finally, that the adjustment of prices to changes in wages is relatively quick.

Highlights

In recent years there has been a large increase in the empirical literature on price behavior
The price setting based on cost and a mark-up is highest in the trade and other business sectors
Firms stated conduct in terms of seasonality of price adjustment is barely consistent with the marked seasonality of inflation observed in the data

Summary

Introduction

In recent years there has been a large increase in the empirical literature on price behavior. As new and detailed data sets become available, we observe a number of important studies on the microeconomic fundamentals of price setting by firms mainly retailers - and their impact on inflation. This analysis allows a better understanding of the behavior, dispersion, and volatility of prices. There are few studies that analyze price setting from surveys that directly ask companies regarding price formation, and most of the literature is concentrated in developed countries. In this study we use a novel data set of a survey of 307 large Uruguayan firms on price setting

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