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Profit maximising goes global: the race to the bottom

David Kiefer and Codrina Rada

Cambridge Journal of Economics, 2015, vol. 39, issue 5, 1333-1350

Abstract: We explore four decades of cyclical and long-run dynamics in income distribution and economic activity for a panel of 13 OECD countries, as measured by the wage share and output gap. When modeled as predator–prey dynamics, economic activity in OECD countries is weakly profit-led. Convergence to a long-run equilibrium is relatively slow delaying the profit-squeeze stage for many years. Our ‘race to the bottom’ model suggests that the OECD countries have been engaged in undercutting each other’s real unit labour costs. An extension of the model shows that the long-run equilibrium has been shifting south-west towards a lower wage share. It may even be that this race has the undesirable consequence of decreasing economic activity.

Date: 2015
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