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Profit Sharing and Unemployment: An Approach with Bargaining and Efficiency-Wage Effects

  • Erkki Koskela
  • Rune Stenbacka
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    We offer a unified framework to analyse the determination of employment, employee effort, wages, and profit sharing when firms face stochastic revenue shocks. We apply a generalized Nash bargaining solution, which extends the wage bargaining literature by incorporating efficiency-wage considerations, profit sharing, and exogenous capital structure. The profit-sharing instrument is demonstrated to have positive effort-enhancing and wage-moderating effects, which exactly offset the negative dilution effect in equilibrium. We show that the introduction of profit sharing decreases equilibrium unemployment if the benefit replacement ratio is high enough, whereas the reverse holds if the benefit replacement ratio is low.

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    Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

    Volume (Year): 160 (2004)
    Issue (Month): 3 (September)
    Pages: 477-

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    Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200409)160:3_477:psauaa_2.0.tx_2-l
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    1. Jerger, Jurgen & Michaelis, Jochen, 1999. " Profit Sharing, Capital Formation and the NAIRU," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(2), pages 257-75, June.
    2. Wadhwani, Sushil & Wall, Martin, 1990. "The Effects of Profit-Sharing on Employment, Wages, Stock Returns and Productivity: Evidence from UK Micro-data," Economic Journal, Royal Economic Society, vol. 100(399), pages 1-17, March.
    3. Bulkley, George & Myles, Gareth D, 1996. "Trade Unions, Efficiency Wages, and Shirking," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 75-88, January.
    4. Cahue, P. & Dormont, B., 1993. "Profit-Sharing: Does It Increase Productivity and Employment?," Papers 9307, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    5. Christopher Martin, . "Efficiency Wages and Union-Firm Bargaining," Economics and Finance Discussion Papers 97-10, Economics and Finance Section, School of Social Sciences, Brunel University.
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