Predator–Prey Model Estimates of the Cyclical Profit Squeeze

This paper extends the empirical literature on the cyclical profit squeeze (CPS) theory of crisis by developing a multivariate model with superior decomposition methods. A structural time series (unobserved components) model with trend and structural VAR components is employed. The VAR captures the dynamic cyclical interaction between unemployment and profit's share of income and is interpreted as a linear version of Goodwin's (1967) predator‐prey model. Model extensions incorporate the accumulation process and structural shifts. Estimation results for the US economy are used to sort out the controversial relevance of the CPS in the post‐1970 period. It is concluded that the CPS is relevant during the period from 1949 to 1985, but is moderately weakened in the post‐1970 period. Inconclusive statistical support for the CPS is found for the post‐1985 era.