Equilibrium Unemployment Under Negotiated Profit Sharing

Abstract

We study employment, employee effort, wages and profit sharing when firms face stochasticrevenue shocks and when base wages and profit shares are determined throughnegotiations. The negotiated profit share depends positively on the relative bargaining powerof the trade union and it has effort-enhancing and wage-moderating effects. We show thathigher profit sharing reduces equilibrium unemployment under circumstances with sufficiently‘rigid’ labour market institutions, i.e. sufficiently high benefit-replacement ratios and relativebargaining powers of trade unions. Conversely, profit sharing seems to be destructive fromthe point of view of employment when the labour market ‘rigidities’ are sufficiently small.

Keywords: efficiency wages, profit sharing, bargaining, equilibrium unemployment

JEL Classification: J51, J41, G32