This purpose of this paper to examine how profit sharing depends on the underlying profitability of firms. More precisely, motivated by theoretical research on fair wages and unionized labor markets, profit sharing is estimated for six different profitability categories: positive, increasing, positive and increasing, negative, decreasing and negative or decreasing.
The paper exploits a high-quality linked employer–employee data set covering the universe of Finnish workers and firms. Endogeneity of profitability and self-selection of firms in different profitability categories are accounted for by an instrumental variables approach. The panel-structure of the data is used to control for unobserved heterogeneity (spell and individual fixed effects).
Profits are shared if firms are profitable or become more profitable. The wage-profit elasticity varies between 0.03 and 0.13 in such firms. However, profits are not shared if firms make losses or become less profitable. There is no downward wage adjustment.
Because of the instrumental variables approach the question of external validity arises. Further empirical research on profit sharing with an explicit focus on firm profitability is warranted. The results of the paper indicate a connection between rent sharing and wage rigidity, as suggested by union and fair wage theory.
This is the first paper to consistently estimate the extent of profit sharing depending on the underlying profitability of firms.
The author is grateful to Ari Hyytinen, Jaakko Pehkonen, Pekka Ilmakunnas, Jari Vainiomäki, Juuso Vanhala, Takao Kato and two anonymous referees for their valuable comments and suggestions. The author also thank the participants at the EEA Annual Congress 2016, the VfS Annual Congress 2016, the Annual Meeting of the Finnish Economic Association 2016, the Summer Seminar of Finnish Economists 2016 and the Allecon Seminar 2016 for helpful comments.
Strifler, M. (2018), "Profit sharing and firm profitability: The differential impact of underlying firm profitability on the wage-profit elasticity", Journal of Participation and Employee Ownership, Vol. 1 No. 2/3, pp. 191-220. https://doi.org/10.1108/JPEO-02-2018-0007
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