Steady State Unemployment under Profit Sharing

Martin Weitzman

Economic Journal, 1987, vol. 97, issue 385, 86-105

Abstract: This paper demonstrates how asymmetric treatment of high-seniority "insider" workers and non-tenured "outsiders" gives rise to bad macroeconomic st eady states in a wage economy. The framework uses a Nash bargaining solution where workers may bargain over pay but firms control hiring. Profit sharing is then considered as an alternative payment mechanism having the automatically corrective incentive property that employers want to hire more outsiders. Given the assumptions of the model, it is shown that widespread profit sharing results in lower unemployment and more output even though it is individually rational for insiders to prefer wages over profit shares. Copyright 1987 by Royal Economic Society.

Date: 1987
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