Profit maximising goes global: the race to the bottom

kiefer, david ; rada codrina;

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
activi