Profit Sharing and Relative Consumption

10 Pages Posted: 20 Oct 2012

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Abstract

Traditionally, it has been argued that profit sharing can increase employment and welfare because it lowers marginal labour costs without reducing total cost or labour income. In this paper, we show that profit sharing can also represent a Pareto-improvement if labour supply is excessive due to relative consumption effects. Mandatory profit sharing reduces wages. If the rise in profit income keeps total income constant, profit sharing will have no income but only a substitution effect. Since labour supply is excessive, profit sharing constitutes a Pareto-improvement.

Keywords: labour supply, profit sharing, relative consumption, status concerns

JEL Classification: D62, J22, J33

Suggested Citation

Goerke, Laszlo, Profit Sharing and Relative Consumption. IZA Discussion Paper No. 6925, Available at SSRN: https://ssrn.com/abstract=2164654

Laszlo Goerke (Contact Author)

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