NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cyclical Response of Advertising Refutes Counter-Cyclical Profit Margins in Favor of Product-Market Frictions

Robert E. Hall

NBER Working Paper No. 18370
Issued in September 2012, Revised in November 2012
NBER Program(s):EFG, LS, ME

According to the standard model, advertising is remarkably sensitive to profit margins. Firms advertise to stimulate demand for their products. They advertise high-margin products aggressively and low-margin ones hardly at all. In macroeconomics, variations in profit margins over the business cycle have a key role. A widening of margins can explain the rise in unemployment in recessions. A higher margin implies a lower real wage. A variety of models ranging from Keynesian to search-and-matching map a decline in wages to higher unemployment. But a rise in profit margins should expand advertising by a lot. Really a lot. Advertising should be highly countercyclical. Instead, it is somewhat procyclical. The ratio of advertising spending to private GDP falls when the economy contracts. The behavior of advertising refutes the hypothesis that profit margins rise. But it is true that the labor share of income falls. Hence there must be another factor that lowers the labor share without raising profit margins. The only influence that fits the facts is a rise in a product-market friction that has the same effect as an increase in sales taxes.

download in pdf format
   (414 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18370

Users who downloaded this paper also downloaded* these:
Mendoza and Terrones w18379 An Anatomy of Credit Booms and their Demise
Berman, Felter, Kapstein, and Troland w18375 Predation, Taxation, Investment, and Violence: Evidence from the Philippines
Ordoñez w18360 The Asymmetric Effects of Financial Frictions
Fishman and Parker w18358 Valuation, Adverse Selection, and Market Collapses
Kydland, Rupert, and Šustek w18432 Housing Dynamics over the Business Cycle
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us