The Simple Economics of Profit Sharing Scheme

Abstract

This paper proposes a very simple structure to reach the heart of the issues concerning profit-sharing schemes. It shows that a framework which assumes that there is no uncertainty is hardly appropriate and that when uncertainty is introduced the claim that profit-sharing can create jobs becomes an ambiguous one. An appealing and intuitive rationale for this ambiguity is given. This represents a middle ground between Weitzmann who claims profit-sharing is employment-creating and his critics who argue that there are no positive effects. The paper argues that the only hard core justification for profit-sharing is to enable mutually profitable trades in risk to occur. Any employment consequence should be seen as incidental and if there is `equilibrium' unemployment then there are alternative and more robust ways of generating more employment.