Profit-Sharing and Employment: Some Doubts

Abstract

Let us begin with a concrete example of the case set out by Martin Weitzman in Chapter 2 and in Weitzman (1984). At present each worker gets, so to speak, a predetermined piece of the income pie, before it is out of the oven, indeed before even its size is known. It is argued that we should replace this with a system where, instead, a significant part of a worker’s remuneration will be tied to the fortunes of the firm. In suggesting that a movement towards profit-sharing might be encouraged by tax incentives, HM Treasury originally envisaged a scheme where the current system might be replaced by one in which, say, 20 per cent of pay becomes profit-linked at the outset. This component of income will vary up and down with profits, while the base wage will remain fixed (during the contract period).

This is an extended version of a lecture delivered in the House of Commons on 24 June 1986. Sushil Wadhwani is a Research Fellow at the London School of Economics.