During business-cycle expansions, wages appear to rise relative to output prices. This fact is easy to square with real-business-cycle models which are based on the assumption that labor is more productive during expansions. However, it is inconsistent with standard business-cycle theories based on aggregate demand fluctuations. In these models, fixed technology and diminishing returns imply that labor becomes less productive as output rises. Thus, in an expansion, wages should fall relative to output prices. Rotemberg and Saloner (1986) and Rotemberg and Woodford (1991, 1992) claim that markups are countercyclical because it is harder for oligopolistic firms to sustain collusive prices during booms. An alternative theory of countercyclical markups is analyzed based on imperfect competition and capital-market imperfections.