Edited by Mark Setterfield
Chapter 17: Profit Sharing, Capacity Utilization and Growth in a Post-Keynesian Macromodel
Gilberto Tadeu Lima* 1 Introduction Though Weitzman’s (1983, 1984, 1985) claim that profit sharing is able to generate full employment and low inflation has not led to its widespread adoption, alternative employee compensation mechanisms have nonetheless become increasingly common in industrialized economies since the 1980s. Weitzman argued that while a wage economy is prone to unemployment in the short run, a profit-sharing economy experiences excess demand for labor. If some part of workers’ compensation is received as a profit share and if, as a result, the base wage is lower than otherwise, firms face a lower marginal cost of labor. Profit-maximizing monopolistically competitive firms will then be willing to hire more workers and given a sufficient degree of profit sharing, an excess demand for labor results. As the marked up price is lower than in a wage economy, a resulting real balance effect leads to a higher aggregate demand and therefore to a higher desired output.1 Weitzman’s propositions about the macroeconomic benefits of profit sharing have often been criticized by economists of different persuasions, and a common heterodox criticism is that Weitzman ignored the truly Keynesian factors of uncertainty and deficient effective demand and implicitly assumed that involuntary unemployment is caused by downward wage inflexibility (see, e.g., Davidson, 1986–87; Rothschild, 1986–87). However well taken these criticisms may be, and the one just mentioned surely is, they do not imply that profit sharing per se should necessarily be dismissed up front. It is therefore the purpose of this chapter...
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