Macroeconomic performance under evolutionary dynamics of employee profit-sharing

This paper investigates the impact on capacity utilization and economic growth as variables driven by effective demand of income distribution featuring the possibility of profit-sharing with workers. Firms choose to compensate workers with either a base wage or a share of profits on top of this base wage. In accordance with robust empirical evidence, workers in sharing firms have higher productivity than workers in non-sharing firms. The distribution of employee compensation strategies and labor productivity across firms is evolutionarily time-varying. Two major results carrying relevant theoretical and policy implications are obtained. First, heterogeneity in employee compensation strategies across firms (and therefore earnings inequality across workers) may emerge as a long-run equilibrium outcome. Second, beyond the short run, a higher fraction of profit-sharing firms may result in either higher or lower rates of capacity utilization and economic growth.