Product Market Competition, Profit Sharing and Equilibrium Unemployment
39 Pages Posted: 15 Dec 2005
Date Written: November 2005
We investigate the implications of product market imperfections on profit sharing, wage negotiation and equilibrium unemployment. The optimal profit share, which the firms use as a wage-moderating commitment device, is below the bargaining power of the trade union. Intensified product market competition decreases profit sharing, but increases the negotiated base wage, because the wage-increasing effect of reduced profit sharing dominates the wage-reducing effect associated with a higher wage elasticity of labor demand. Finally, we show that intensified product market competition does not necessarily reduce equilibrium unemployment, because it induces both higher wage mark-ups and lower optimal profit shares.
Keywords: product market competition, profit sharing, wage bargaining, equilibrium unemployment
JEL Classification: J33, J51, L11
Suggested Citation: Suggested Citation