Inequality and market power in Latin America and the Caribbean

This study estimates firm-level markups (product market power) and markdowns (labor market power) for formal firms in 16 Latin American and Caribbean (LAC) countries and 28 economically comparable but less unequal countries. Objectives include (1) contrasting market power in LAC firms with peers; (2) evaluating its effect on firm-level labor revenue share; and (3) assessing its influence on the overall labor income share, considering market power’s distribution, labor share and firm size. Findings reveal LAC firms’ average price markup is 87% over marginal costs, and wages are 38% below labor’s marginal revenue product. The firm-level negative link between labor share and market power mainly stems from labor market power, more pronounced in larger firms. This influences the total labor share and income distribution. Yet, LAC’s market power intensity and distribution don’t surpass its peers, nor do they contribute more to inequality.