PROFIT MARGINS AND THE BUSINESS-CYCLE - EVIDENCE FROM UK MANUFACTURING FIRMS

This paper presents some empirical models of profitability, using panel data covering 709 large UK companies over the 1970s and 1980s focusing specifically on the role of aggregate demand shocks in shaping firm-level profitability. In basic regressions and in quite complex econometric models the results suggest that firm-level profit margins fell heavily during the deep manufacturing recession of the early 1980s and, as such, are consistent with models predicting the procyclical nature of profit margins. This result holds across different product groups (producer goods, consumer durables and non-durables), though the timing of the impact of aggregate shocks appears to differ.