Labor Supply Constraints, Profit-Sharing and Volatility Rents in an Unstable Economy

Peter J Morton

Economic Inquiry, 1994, vol. 32, issue 2, 330-41

Abstract: Contracts that pay part of labor compensation as a profit share may be made distributionally identical to fixed-wage contracts under long-run equilibrium conditions, but this does not guarantee distributional equivalence in the presence of mean-preserving turbulence around the equilibrium state. This paper demonstrates how, given a full-employment constraint, the small-scale introduction of share contracting reduces cyclical unemployment but lowers cyclical average profits compared to a fixed-wage regime. As share contracting is extended to cover the entire wage bill, the tendency is to freeze factor shares at their long-run equilibrium values, regardless of shocks. Copyright 1994 by Oxford University Press.

Date: 1994
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