LABOR SUPPLY CONSTRAINTS, PROFIT-SHARING AND VOLATILITY RENTS IN AN UNSTABLE ECONOMY

Contracts which pay part of labor compensation as a profit share may be made distributionally identical to fixed-wage contracts under long-run equilibrium conditions, but this does not guarantee distributional equivalence in the presence of mean-preserving turbulence around the equilibrium state. This paper demonstrates how, given a full-employment constraint, the small-scale introduction of share contracting reduces cyclical unemployment but lowers cyclical average profits compared to a fixed-wage regime. As share contracting is extended to cover the entire wage bill, the tendency is to freeze factor shares at their long-run equilibrium values, regardless of shocks.