The Economic Impact of Profit Sharing

Abstract

The discussion on a financial participation of employees has a long history. In Germany, one could virtually speak of an evergreen debate: In the fifties and sixties, the issue of distributive justice was emphasized. The participation of employees in capital and profits was seen as an instrument of “wealth accumulation in workers’ hands” (Oberhauser, 1963, Föhl, 1964) and resulted in the introduction of the first Capital Formation Law in 1961. In the eighties, the focus then shifted to a possible employment effect of profit sharing. Martin Weitzman propagated profit sharing in his Share Economy (1984) as a means to reduce unemployment, thereby sparking a yearlong controversy. During the last decade, financial participation is discussed primarily on two different levels: In the East German context, specifically, it has been argued that profit sharing might help to attenuate the unemployment problem. The idea is that wages in East Germany have converged to the higher West German level too quickly. If part of the wages was tied to the firms’ profits and not paid out but rather invested into the firms, two birds could be killed with one stone: Wage flexibility would increase and the firms’ equity situation could be improved thus leading to an overall increase in the firms’ competitiveness which might then, in turn, have a beneficial impact on unemployment (Sinn and Sinn, 1991, Hübler, 1995, Sinn, 1997, Priewe, 1997). Lately, the discussion of profit sharing as a means to increase wage flexibility has also been extended to the West German context. The other issue concerns the incentive effects of profit sharing which have been brought into discussion at regular intervals not only in Germany, but also internationally.