PROFIT SHARING, WAGE BARGAINING, AND UNEMPLOYMENT

The Paper examines the effects of profit sharing in an economy with decentralized wage bargaining. Profit sharing makes workers' income more sensitive to wage changes, and this leads to wage moderation. But economy-wide profit sharing may also improve worker's outside income opportunities, and this strengthens the union's hand in bargaining and tend to raise wages. It turns out that equilibrium unemployment is reduced by profit sharing as long as the elasticity of substitution between labour and capital is less than one, whereas unemployment is increased if the elasticity of substitution is greater than one.