Profit Sharing and Relative Consumption
9 Pages Posted: 31 Oct 2012
Date Written: October 30, 2012
Traditionally, it has been argued that profit sharing can increase employment and welfare because it lowers marginal labor costs without reducing total cost or labor income. In this paper, we show that profit sharing can also represent a Pareto-improvement if labor 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 labor supply is excessive, profit sharing constitutes a Pareto-improvement.
Keywords: labor supply, profit sharing, relative consumption, status concerns
JEL Classification: D620, J220, J330
Suggested Citation: Suggested Citation