Economic Crisis and National Economic Competitiveness: Does Labor Cost Link the Two? The Case of the South Eurozone States

Abstract

A widely accepted thesis, especially by international organizations and economic policy practitioners is that national economic competitiveness is determined by the unit labor cost, prescribing a policy of wage reductions, i.e. internal devaluation for improving national economic competitiveness. The current paper disputes this thesis arguing that it is based on theoretical and methodological misconceptions and oversimplifications, misinterpreting the Ricardo’s comparative advantage model, especially the source of comparative advantages. The Kaldor’s paradox supports in empirical terms the arguments put forward in this paper. Equally important, the paper argues that national economic competitiveness is related to the functional income distribution. It analyses the relationship between gross profits and productive investments, and it applies the conclusions of the analysis to the euro zone southern countries.