Flexible and committed profit sharing with wage bargaining: Implications for equilibrium unemployment

We analyze the relationship between profit sharing, employee effort, wage formation and unemployment under different relative timings of the wage and profit sharing decisions. The optimal profit share under commitment exceeds that under flexibility, because through a profit share commitment the firm can induce wage moderation. The negotiated profit sharing depends positively on the bargaining power of trade union and it has both effort-enhancing and wage-moderating effects. Higher profit sharing is shown to reduce equilibrium unemployment under "sufficiently rigid'' labor market institutions, but it can harm employment when labor market "rigidities'' are "small enough''.