Macroeconomic Implications of Profit Sharing

This article argues that substantial progress in the struggle for full employment without inflation will have to come largely from basic changes in pay-setting arrangements rather than from better manipulation of financial aggregates. My analysis suggests that widespread profit sharing, along the general lines practiced in Japan, represents a structural reform of the labor market that is likely to improve the unemployment-inflation trade-off. I attempt to place the problem of labor payment mechanisms in historical perspective; I then provide an analytic framework for comparing wage and profit-sharing systems. Major criticisms of profit sharing are discussed in a question and answer format. Profit sharing is then compared with three alternative and, I argue, less promising prototypes for structural reform of the labor market: incomes policy, two-tiered pay, and employee control. The Japanese experience is then examined with an eye to evaluating the possible macroeconomic impact of the bonus system and implications for profit or revenue sharing.