Factor price convergence in OECD economies: the case of three profit rates indicators

Abstract

This paper examines profit rate (rates of return to capital) convergence in OECD economies in the periods of 1960-2016 and relevant sub-periods. It also performs comparison of profit rates convergence in selected developed and developing economies, using the data for 1973-2003 period. Economy-wide, productive economy and manufacturing rates are estimated and three convergence concepts are considered (beta, sigma, and stochastic convergence). We use a combination of cross-sectional and univariate time series models and density distribution analysis. For each profit rate measure, a strong evidence of beta convergence is provided. In contrast, sigma convergence is indicated only in the case of productive economy profit rate; while in other cases, sigma divergence or the absence of either convergence or divergence are likely. Stochastic convergence is present in a smaller number of economies and is confined to productive economy and manufacturing. The comparison of convergence dynamics in developed versus developing economies confirmed beta convergence in both groups and for their aggregate, but did not establish sigma convergence, given the significant diversity of economies and their different economic trajectories.

Keywords:
Profit rates; Convergence; Unit root