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Profit maximising goes global: the race to the bottom

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  • David Kiefer
  • Codrina Rada

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.

Suggested Citation

  • David Kiefer & Codrina Rada, 2015. "Profit maximising goes global: the race to the bottom," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 39(5), pages 1333-1350.
    • Handle: RePEc:oup:cambje:v:39:y:2015:i:5:p:1333-1350.
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    File URL: http://hdl.handle.net/10.1093/cje/beu040
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    More about this item

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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