Profit Sharing and Relative Consumption

9 Pages Posted: 31 Oct 2012

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Date Written: October 30, 2012

Abstract

Traditionally, it has been argued that profit sharing can increase employment and welfare because it lowers marginal labor costs without reducing total cost or labor income. In this paper, we show that profit sharing can also represent a Pareto-improvement if labor supply is excessive due to relative consumption effects. Mandatory profit sharing reduces wages. If the rise in profit income keeps total income constant, profit sharing will have no income but only a substitution effect. Since labor supply is excessive, profit sharing constitutes a Pareto-improvement.

Keywords: labor supply, profit sharing, relative consumption, status concerns

JEL Classification: D620, J220, J330

Suggested Citation

Goerke, Laszlo, Profit Sharing and Relative Consumption (October 30, 2012). CESifo Working Paper Series No. 3970, Available at SSRN: https://ssrn.com/abstract=2168676

Laszlo Goerke (Contact Author)

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