some macroeconomic implications of alternative compensation systems a basic theme of this paper is the idea that some structural reform of employee compensation arrangements is necessary to make reasonable price stability compatible with reasonably full employment in this view even the best designed macroeconomic policies are much too aggregative to get at the heart of the stagflation problem the ultimate solution involves going inside the workings of a modern capitalist economy and correcting the underlying structural flaw directly on the level of the individual firm stagflation represents an especially intractable policy dilemma for macroeconomics without a decisive tendency of the economic system to remain near full employment there is a strong prima facie case for fighting recessions by exogenously stimulating aggregate demand but the usual keynesian expansionary policies tend to impart an inflationary inertia that is difficult to choke off and of course the basic strategy for fighting inflation is to cool down the economy by restrictive monetary and fiscal policy thereby increasing unemployment and closing the viscous circle because the practical macroeconomic policies for dealing with unemployment and inflation are so diametrically opposed stagflation is a pervasive structural problem when for whatever reason there is basically an unfavourable short run tradeoff between unemployment and inflation economic policy tends to vacillate between expansion of demand to fight unemployment and restriction of demand to fight inflation polarising the electorate and distracting society from dealing effectively with its underlying real economic problems even the difficulty of attaining external balance in foreign accounts is largely a spillover into the international payments arena of an inability to achieve an acceptable internal balance between full employment and price stability this paper takes what might be called a comparative systems approach to the problem of stagflation at the heart of modern industrial capitalism is an incredibly complicated system of overlapping monopolistic competitors 2 a starting point for the paper is the realisation that the coordination difficulty which can cause some systems to suffer involuntary unemployment is not inherent in laissez faire private enterprise per se it is closely tied to one particular property of a conventional wage payment system namely compensation of each firm s employees is stuck to an outside numeraire whether money or a cost of

unknown wage offer distribution and job search duration abstract if job searchers do not know the wage offer distribution they are facing they might take the wage structure in their last firm as a prior doing so reservation wages will be biased which will also bias unemployment duration using data for austrian workers it is shown that workers seem to have good knowledge of expected mean wages but less so for higher moments of the wage offer distribution

unemployment profit sharing and japan s economic success abstract in this paper we examine the economic effects of profit sharing in a duopoly model where one firm engages in sharing profits with its union while the other firm does not the results show that profit sharing i reduces wages demanded by the unions ii tends to increase employment of the profit sharing firm and to increase employment in the entire industry and iii tends to increase the joint welfare of the profit sharing firm and the profit sharing union these results seem to suggest that the japanese success may be partly attributable to their informal profit sharing scheme

workers savings and the right to manage most western capitalist institutions are islands of fascism in a sea of democracy but democracy can be introduced from the political to the economic sphere by re assigning the right to manage from capital owners to workers thereby creating a sector consisting of self managed firms such firms require external finance for efficiency this can be supplied via a new form of financial asset performance bonds to be held by wage earners investment funds reforms such as these could improve productivity and the quality of working life strengthen the role of markets and help to deal with the so called pensions crisis these reforms would threaten the interests of private capital owners and would therefore require decisive political action they can thus be differentiated sharply from voluntary enterprise level schemes for introducing profit sharing employee share ownership or industrial democracy

evaluating unemployment policies what do the underlying theories tell us the paper surveys unemployment policies for advanced market economies and evaluates them by examining the predictions of the underlying macroeconomic theories the basic idea is that for the most part different unemployment policy prescriptions rest on different macroeconomic theories and our confidence in the prescriptions should depend at least in part on theories ability to predict some salient stylized facts about unemployment behavior the paper considers four types of policies laissez faire demand management policies supply side policies and structural policies copyright 1995 by oxford university press

ranking alternative share contracts under rational expectations abstract this paper analyzes the price level and output stabilization properties of share contracts in a log linear rational expectations model profit sharing product wage and wage fund share contracts are compared to flexible and downwardly rigid nominal wage schemes we find that when the disturbances to the economy are nominal labor compensation schemes which reduce real variability exacerbate nominal variability when the disturbances are real compensation schemes which reduce real variability can also reduce nominal variability

intra firm bargaining under non binding contracts we present a new methodology for studying the problem of intra firm bargaining based on the notion that contracts cannot commit the firm and its agents to wages and employment we develop and analyse a general non cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party equilibrium firm profits are characterizable as both a weighted average of a neo classical non bargaining firm s profits and a generalization of shapley value for a corresponding cooperative game furthermore the resulting payoffs induce economically significant distortions in the firm s input and organizational design decisions

an evolutionary model of bertrand oligopoly we analyze the long run outcome of markets in which boundedly rational firms with a decreasing returns to scale technology compete in prices the behavior of these firms is based on limitation of success and experimentation in this framework we introduce a new approach to model boundedly rational behavior based on the idea of behavioral principles i e formal descriptions even with the simplest ones the result is that the prices announced are a strict refinement of the set of nash equilibria with more sophisticated behavioral principles the long run outcome corresponds to the concept of central prices wich are also nash equilibria introduced here this is a robust and clear cut prediction wich under quadratic costs and arbitrary demand essentially coincides with the walrasian equilibrium

is incomes policy the answer to unemployment in western europe unemployment has remained obstinately high ever since 1975 what has prevented governments from reducing it the answer is simple if unemployment were reduced by normal methods inflation would rise it follows that the only way to cut the long run level of unemployment is to find some other way of controlling inflation no such device will be costless but if we could find any method that was less costly than unemployment we ought to adopt it maurice chevalier was asked in later life what he thought of old age it s not so bad he replied when you consider the alternative that was a true economist talking and it is also the spirit in which i shall approach the unhappy choices open to us my argument will proceed roughly as follows first imagine that a costless incomes policy is available then most people would probably agree that if inflation was too high a temporary incomes policy would be a good idea in order to get inflation down but what then when it was down we would still be left with far too high an unemployment rate only a permanent incomes policy can substantially reduce the non inflationary level of unemployment however against these benefits have to be set the costs of an incomes policy a conventional incomes policy which permanently suspended collective bargaining would be out of the question in a free society so we have to have an incomes policy that works by incentive rather than by regulation the best thing would be a tax on wage increases levied on employers and proportional to wage increases above a prescribed norm i shall spend some time discussing this tax using various different models of wage setting to explain how it would have its effect and finally i shall try producing a first draft of the operator s manual

the macroeconomic implications of profit sharing some empirical evidence the macroeconomic implications of profit sharing some empiricals paper attempts an empirical assessment of weitzman s proposition that profit sharing provides an antidote to stagflation taking japan as an example of a profit sharing economy the author shows that it does not have either lower cyclical variability of output or lower inflation than other industrial countries the authors then reject the propositions that in a profit sharing economy 1 aggregate demand shocks have a smaller effect on output deviations and 2 import price shocks and wage push have a smaller effect on inflation therefore one should be wary of the claim that the japanese case supports weitzman s model copyright 1987 by royal economic society

imitation by price and quantity setting firms in a differentiated market abstract we study the evolution of imitation behaviour in a differentiated market where firms are located equidistantly on a salop circle firms choose price and quantity simultaneously leaving open the possibility for non market clearing outcomes the strategy of the most successful firm is imitated behaviour in the stochastically stable outcome depends on the level of market differentiation and corresponds exactly with the nash equilibrium outcome of the underlying stage game for high level of differentiation firms end up at the monopoly outcome for intermediate level of differentiation they gravitate to a mutually non aggressive outcome where price is higher than the monopoly price for low level of differentiation firms price at a mark up above the marginal cost market clearing always results endogenously

labor market share contracts when the firm has two variable inputs this paper extends weitzman s analysis of share contracts firstly a second variable input is introduced into a firm s production technology some share contracts give the firm an incentive to reduce worker compensation by manipulating the second variable input this implies that contracts which possess this property cannot support the same long run equilibrium as would be achieved with a wage contract secondly a positively sloped labor supply curve is introduced it is shown that while share contracts reduce involuntary unemployment they may not reduce total unemployment vis a vis wage contracts the paper identifies the factors which determine relative employment variability

l investissement francais dans les colonies 1876 1940 une autre analyse de l enquete de gouvernement de vichy 1943 this paper presents an econometric model of trade union membership in the united kingdom the empirical model utilizes cyclical variables in the explanation of membership changes and separates the short and long run dynamics explicitly it proves to be a superior specification to previous business cycle models estimated for the united kingdom and predicts satisfatorily the recent decline in membership the inclusion of a dummy variable reflecting the political complexion of the government is the only secular variable which significantly improves equation performance but the composition of changes in employment plays no part in explaining the recent decline in membership copyright 1988 by the london school of economics and political science

profit sharing as a cure for unemployment some doubts abstract in this paper we argue that given that a wage system is preferred to profit sharing in an insider outsider model tax incentives to encourage profit sharing could be dissipated by the use of cosmetic schemes the same may also be true in models in which unions care about employment hence we should be cautious about accepting weitzman s claim that profit sharing will reduce unemployment

price changes supply elasticities industry organization and dairy output distribution long run price elasticities of milk supply are decomposed into price elasticities of yield herd size and farm population for northeastern u s dairy farms these elasticities are shown to vary with farm size because of size related differences in capital intensity specialization yield and herd size variability and rates of entry exit into dairy in the short run price responsiveness is shown to decrease with farm size in the long run large farms are shown to be most price responsive results suggest that lower milk prices could make revenue distribution less equal in both the short and long run by altering output and population distributions

job queues and the union status of workers this paper develops a model of the determination of the union status of workers that allows for the possibility of queuing for union jobs the empirical results derived using a sample from the university of michigan panel study of income dynamics are supportive of the queuing hypothesis the no queue model can be rejected using a likelihood ratio test this suggests that a simple probit or logit model for union status is misspecified because it is not based on any consistent behavioral theory an important implication of the model is that because most new entrants to the labor market prefer union jobs but cannot get them and because accrual of nonunion seniority makes workers progressively less likely to desire union jobs the union status of workers is largely determined by their success in being selected from the queue early in their working life

negotiation of profit sharing contracts in industry we examine the properties of profit sharing in a game theoretic oligopoly model of industry profit sharing contracts are viewed as a means of strategic commitment not as an internal incentive system in our model firms choose a contract subject to the employees participation constraint in a first stage and compete on the output market in a second stage we show that the choice of a profit sharing contract by each firm is a non cooperative equilibrium in the case of cournot competition the game under study has the structure of the prisoners dilemma the case of price competition on the output market leads to somewhat different conclusions

survival at the center the stability of minimum differentiation abstract we model a hotelling market with multidimensional product differentiation in an evolutionary framework both evolutionary stability in the sense of schaffer 1989 and stochastic stability following kandori et al 1993 young 1993 are analyzed it is shown that firms move towards the center in product space i e a principle of minimum differentiation on all dimensions of the product space applies

profit sharing in a unionised economy with imperfect competition abstract this paper sets up a simple model of a unionised economy and shows that the introduction of profit sharing unambiguously reduces the unemployment rate the result arises because unions are assumed to care about the employment of their members but cannot bargain over employment directly profit sharing reduces the perceived cost in terms of worker income foregone of increasing employment in the firm in the economy as a whole the equilibrium unemployment rate falls

how income transfer programs affect work savings and the income distribution a critical review for helpful comments on earlier drafts we thank without implicating moses abramovitz yves balcer john bishop alan blinder richard burkhauser michael darby irwin garfinkel alan gustman daniel hamermesh martin holmer george jakubson robert lampman paul menchik robert moffitt michael murray joseph quinn timothy smeeding eugene smolensky barbara wolfe and two anonymous referees

profit sharing risk sharing and firm size implications of efficiency wages by taking account of output fluctuations this paper constructs a synthesis of profit sharing and efficiency wage models to highlight the role of the risk attitudes of the firm and its employees we show contrary to the traditional efficiency wage theory that in a profit sharing economy unemployment is no longer a necessary device to induce work effort and consequently the labor market equilibrium may be characterized by full employment such a result is more likely to be true when the economy is characterized by small sized firms in addition we also provide a preliminary sketch of the situations in which the firm chooses a profit sharing program or a fixed wage one and discuss how a firm determines its pay parameters and employment in response to output fluctuations

imitation and price competition in a differentiated market abstract we study the stable market outcome that evolves in a spatially differentiated market when price competing firms choose actions by imitation of the most profitable firm we compare and contrast the stable outcomes under two imitation procedures one where each firm immediately imitates the most profitable firm and the other when a firm imitates another firm only if it is more profitable while being sufficiently similar in context of the market segment it operates in or sufficiently close in either case the symmetric pure strategy nash equilibrium is always a stable outcome however when imitation of the most profitable firm is immediate and market differentiation is moderate states with prices lower than the nash equilibrium are also stable in contrast when imitation of the most profitable firm is more gradual and market differentiation is below a threshold states with prices above the nash equilibrium are also stable thus while competitive evolutionary pressure in this imitation based model does result in the nash equilibrium always being stable other outcomes may be stable as well interestingly the states that are stable under gradual imitation give the firms a higher profit than the stable states under immediate imitation

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

profit sharing and employment variability microeconomic evidence on the weitzman theory this study tests an important implication of weitzman s profit sharing theory the prediction that profit sharing firms will have more stable employment than fixed wage firms using panel data on 2 976 publicly traded companies for the years 1971 85 profit sharing manufacturing firms are found to have had smaller employment decreases than other manufacturing firms during business downturns when the unemployment rate increased by one point manufacturing firms in which all employees participated in a profit sharing pension plan had a 2 0 decrease in employment compared to a 3 1 decrease for nonprofit sharing manufacturing firms no significant differences in employment stability were found however between profit sharing and non profit sharing firms in the non manufacturing sector

islamic economics the emergence of a new paradigm the authors illustrate the potential impact of the islamic doctrine on western economic relationships by focusing on the prohibition of interest riba in islamic economics they show that the alternate method of financier remuneration i e mudarabah profit and loss sharing will under certain conditions enhance capital investment on account of its ability to act as an efficient revelation device by applying ideas developed in the western contract literature the authors show that a mudarabah contract between the manager of a project and a syndicate of investors may permit a more efficient revelation of any informational asymmetries between the two copyright 1994 by royal economic society

profit sharing and optimal labour contracts this paper examines the effect of introducing profit sharing arrangements into union firm contracts it is shown that if bargaining is efficient using the generalized nash bargain profit sharing has no effect on the bargaining outcome this is true both when the profit sharing restriction is exogenously imposed by legislation and when profit sharing is part of the optimal contract however if the initial bargaining process is inefficient because direct negotiation on total employment is precluded an optimal contract can use profit sharing to establish the efficient bargaining outcome both types of bargaining models have been employed in the literature

contract form wage flexibility and employment we begin with two uncontroversial hypotheses firm productivity is expensive to measure and employment entails relationship specific investments these assumptions imply that firms would optimally choose fixed wage contracts and complement these with bonus pay when measuring employee performance is not too costly these assumptions imply that under an optimal employment contract hours of work is less responsive while total compensation is more responsive to shocks under bonus pay contracts compared to fixed wage contracts using data from the panel study of income dynamics psid where shocks are proxied using the local unemployment rate we find strong support for these two implications

the future of the income tax the federal income tax has been under attack by the economics profession for more than a decade the attack comes from two directions supply siders who believe that progressive income taxation impairs economic incentives and more traditional economists who would substitute a progressive expenditure tax for the income tax 2 at one time support for the expenditure tax was confined to a few members of our profession including such distinguished names as john stuart mill irving fisher nicholas kaldor and james meade today it is fair to say that many if not most economists favor the expenditure tax or a flat rate income tax this group has joined the opponents of progressive taxation in the attack on the income tax despite an incessant barrage from both groups no country in the world is planning to abandon the income tax or is even considering a personal expenditure tax a wave of tax reform beginning with the u s reform in 1986 has been sweeping the world aimed at improving the income tax not at eliminating it tax preferences formerly regarded as sacrosanct are being removed and there is a distinct movement toward comprehensive income taxation 3 however individual income tax rates are being cut tax progressivity has been declining almost everywhere and reliance on the income tax has been diminishing it will come as no surprise to this audience that i approve of the base broadening feature of the current tax reform movement but i believe that the reduction in the redistributive effect of the income tax has gone too far in this paper i shall show that the progressivity of the u s tax system never very pronounced except during and immediately after the two world wars has been declining for more than two decades and that the tax reform act of 1986 reversed this decline but only slightly consequently we have a long way to go to improve the equity of the tax system i believe this can be done without punitive tax rates that will hurt economic incentives i begin with a brief review of recent changes in the u s distribution of income and follow this with an analysis of the effect of taxes on the income distribution i next examine arguments for and against the income tax with particular emphasis on its effects on economic incentives and its merits when compared with the expenditure tax i then evaluate the income tax as it emerged from the 1986 tax reform and conclude with tjoseph pechman passed away on august 19 1989 his presidential address was delivered at the onehundred second meeting of the american economic association december 29 1989 atlanta georgia joseph a pechman economic studies program the brookings institution 1775 massachusetts avenue nw washington dc 20036 i have benefited from the comments and suggestions on an earlier draft of this paper by henry j aaron richard goode jane g gravelle robert w hartman donald w kiefer herbert e klarman robert d reischauer clifford m winston and h peyton young but they should not be held responsible for the views expressed in this paper i am indebted to richard kasten for various simulations i am also grateful to stephen j kastenberg for research assistance and to diane a shugart valerie m owens and sara c hufham for secretarial assistance some of the more extreme supply siders argued that large tax cuts pay for themselves see for example laffer 1981 but i believe it is fair to say that this view has been totally discredited for a more reasonable supply side view see the economic report of the president 1982 2see for example michael j boskin 1978 david e bradford 1980 charles l ballard don fullerton john shoven and john whalley 1985 paul courant and edward gramlich 1982 martin feldstein 1978 robert hall and alvin rabushka 1985 john kay and mervyn king 1983 charles mclure 1987 mieszkowski 1980 and lawrence summers 1981 it is interesting that the recent popularity of the expenditure tax among economists was stimulated by a tax lawyer william d andrews 1974 3see pechman 1988

common pool equities an arbitrage based non cooperative solution to the common pool resource problem abstract it is proposed that a new type of property right termed a common pool equity can solve the common pool resource problem this equity may be presented to any firm that extracts from the resource for a share in profits it is shown that a profit arbitrage condition ensures that the market and socially efficient solutions correspond whenever market power is absent the cost externalities are fully internalized

is profit sharing participation evidence on alternative firm types from west germany abstract systematic differences are reported in the structural and performance characteristics of firms in subsamples based on a profit sharing and b participation in control employee involvement in decision making moreover whereas group b firms tend to conform to a theoretical participatory stereotype group a firms do not the coincidence of profit sharing and participation in control in a given firm is not surprisingly quite low these results cast doubt on current theoretical and policy arguments concerning productivity gains dependent on the joint use of participation and profit sharing but indicate that one precondition for weitzman type macro economic benefits of profit sharing in the absence of participation may be present

trade union efficiency and overemployment with seniority wage scales inefficient unemployment of union members depends upon the inability of the union to bargain over employment as well as wages the issue of union membership limitations has received less attention as seen in the survey by oswald i 983 grossman i983 considers endogenous membership size with mixed efficiency results but he imposes a number of severe restrictions on allowable contracts in the current paper we examine the issue of union membership size under very general contracts where unions negotiate over wage rates employment levels and compensation payments to laid off workers and further can negotiate differential treatment of seniority groups these general contracts represent a useful benchmark case recognising that the results will change as various limitations on the contract are imposed the treatment of seniority is crucial and we model this by an overlapping generations approach continuing workers at the firm negotiate the contract to be applicable to the following period new hires over that period in the number stipulated in the contract then gain seniority and negotiate the contract for the period after the formulation of the problem with the exception of the treatment of new hirings is similar to that in the implicit contracting literature and many of the results will be familiar unemployment of union members only occurs when the marginal value product of labour fails below the opportunity cost leisure value

seniority and efficiency the role of seniority in efficient compensation and employment arrangements between a firm and its labor pool is examined seniority is treated as an endogenous factor in a dynamic model with uncertainty nonseparability over time in preferences and production emerges as a pivotal aspect of seniority provisions in efficient allocations the analysis focuses on two dynamic factors that have been emphasized in the literature nonseparable worker preferences in leisure and a learning by doing process of human capital accumulation copyright 1992 by the editors of the scandinavian journal of economics

comment on can the share economy conquer stagflation the main thrust of nordhaus paper seems to me to be the following there is no such thing as an excess demand for labor in a share economy and any propositions following from such an idea are at least suspect and probably wrong in my view the concept of excess demand for labor is merely a heuristic device that many people find useful as a way of thinking about what is happening in a share economy in a short run when pay parameters are quasi fixed relative to everything else but absolutely nothing substantive depends on using this phrase or even understanding what it means a reader of my economic journal article 1983 should understand this point quite clearly a shortrun equilibrium is there defined for a situation where pay parameters are quasi fixed and every other variable in the system including labor can be freely changed then a long run equilibrium where pay parameters are also free to vary is defined the basic result is that small changes in the neighborhood of a long run equilibrium may produce short run unemployment in a quasi fixed wage system but not in a quasi fixed share system this result is robust to various assumptions about labor mobility and survives a number of other alterations let me rephrase the basic argument without ever making use of the concept of excess demand for labor suppose that there are two kingdoms old lakeland and new lakeland which are physically identical in every way the economies of both identical twin kingdoms consist exclusively of fishing from the numerous privately owned lakes and exporting all of the fish at given world prices in old lakeland the monarch has decreed that the money wages to be paid throughout the year at each lake are to be posted on january 1 of that year and cannot be altered until january 1 of the next year in new lakeland the monarch has decreed that payment at each lake shall consist of a share of the value of the fish caught per worker the share fraction applying throughout the year is to be posted on january 1 of that year and cannot be altered until january 1 of the next year in both economies once the pay parameters wages or share fractions are posted workers are free to migrate to that highest paying lake which will employ them suppose that the world price of fish has been steady for as long

levels and long term trends in earnings inequality overcoming current population survey censoring problems using the gb2 distribution over its history the march current population survey cps has increasingly captured the upper tail of the distribution of all sources of income this together with time consistency problems in top coding means that users of both the public use and restricted access cps will understate the level of wage earnings and income inequality in earlier years and overstate their growth over time we address this problem by modeling the personal earnings of full time full year workers using the generalized beta distribution of the second kind calculating gini coefficients from the estimated parameters and comparing them with past findings

profit sharing as macroeconomic policy when keynes came to sum up the central message of the general theory for the economics profession in a remarkable but by now long forgotten qje article of 1937 he began with a general philosophical disquisition on the behavior of mankind under uncertainty here as elsewhere keynes made it abundantly clear that he shared frank knight s distinction uncertainty did not mean risk that which is at least in principle reducible to well defined actuarial probabilities by uncertainty keynes intended i believe to convey the idea of ignorance that which is essentially due to insufficient or precarious knowledge of the mechanism by which the future is generated out of the past the keynesian scenario looks out over an economic world that is rife with uncertainty in that world expectations play an important dual role as both a manifestation of uncertainty and a cause of it such expectations are arbitrary to some degree because they can be based on almost anything including self fulfilling expectations of the behavior and expectations of others and as keynes pointed out being based on so flimsy a foundation these expectations of expectations are subject to sudden and violent changes it follows that while there may ultimately be some long run forces drawing it toward full employment capitalism may also have some deep seated tendencies toward shortrun instability unadulterated laissez faire is likely to be out of equilibrium much of the time and even when it is in equilibrium there is no guarantee of being in a good equilibrium whether in a state of bad equilibrium or merely in disequilibrium such coordination failures generate undesirable macroeconomic consequences like unemployment which can cause very significant welfare losses by the ultimate logic of this keynesian worldview then the stage is set for some form of government intervention to recoordinate the economy into a better configuration any such government policy will inevitably introduce some microeconomic distortions but as an empirical matter such losses tend to be small relative to the enormous welfare gains from having an economy operate at its full employment level such general considerations do not indicate the best form of government intervention to stabilize the macroeconomy indeed we do not currently have a general realistic framework within which a meta issue like that might be properly addressed nevertheless it is possible i believe to give some common sense criteria for desirable forms of government intervention it is my contention that economists have not been sufficiently imaginative in devising operational mechanisms or systems possessing advantageous macroeconomic properties the usual fiscal and monetary policies are to my mind sledgehammer like tactics for controlling unemployment and inflation they do the job but clumsily by brute force and they can leave a big mess afterwards i think it is possible to find subtler alternatives that operate more cleanly and with a softer touch by taking a page from the book of adam smith a good mechanism for fighting unemployment and inflation should have several noteworthy characteristics it should be decentralized based on the natural microeconomic incentives of a market like environment it should work more or less automatically keeping to a minimum the need for using discretionary government policy and in a highly uncertain world it should be robust in retaining its desirable macroeconomic characteristics over a wide range of possible situations or circumstances including some that are currently unforseen i want to argue that a superior form of government policy for combating unemploy department of economics massachusetts institute of technology cambridge ma 02139

the incentive effects of dismissals efficiency wages piece rates and profit sharing the relation of several incentive schemes to productivity is studied with a particular emphasis on the effects and determinants of dismissals dismissals turn out to be positively but in a nonlinear way associated with productivity similarly profit sharing raises productivity wages and piece rates are insignificant profit sharing decreases the number of dismissals made by firms copyright 1991 by mit press

the evolution of walrasian behavior consider an evolutionary context where a given number of quantity setting oligopolists tend to mimic successful behavior occasionally experimenting with some small probability in this context it is shown that the unique long run outcome of the process has all firms playing walrasian i e choosing an output that maximizes profits when taking the market clearing price as given

labor union objectives and collective bargaining we consider a model oflabor union behavior in which workers make decisions about wages and employment by simple majority rule we show that under general conditions such a union has a well behaved objective function different from those previously postulated in the literature we then show that the union s majority preferences generally lack a von neumann morgenstern utility representation and thus cannot be inserted into traditional bargaining models we then develop and characterize the solutions to a new bargaining model that is consistent with the structure of union preferences several comparative statics results are presented

is profit sharing a cure for unemployment in less developed countries abstract the effects of introducing profit sharing in modern sectors in ldcs are discussed within a dual model with endogenous wages and internal migration profit sharing does not have a direct job creation effect as long as firms set the pay parameters yet the new system may have long run effects on employment allocation under some circumstances profit sharing may in fact destabilize short run employment such that jobs last for a shorter duration modern sector wages are then raised to discipline workers and urban unemployment goes up arguments are also given for the hypothesis that profit sharing stabilizes short run employment with the opposite results

counterinflationary policy in a unionised economy with nonsynchronised wage setting a model of the determination of wages and employment in a unionised economy with nonsynchronised wage setting is presented in this paper it is shown that a monetary deflation can lead to prolonged unemployment even though the unions act rationally and with full information about the change in policy the model generates a statistical phillips curve in which the rate of change of money wages depends on the anticipated growth rate of the money supply and on disequilibrium unemployment conventional incomes policies are shown to have desirable social effects but run counter to the perceived self interest of the trade unions and are therefore likely to be resisted taxes on wage increases have desirable long run effects but do not appear able to reduce the transitional unemployment costs of monetary deflation

profit related pay prose discovered this paper estimates that in 1984 43 percent of british private sector establishments had some form of profit related pay regression results do not show that these establishments had statistically significant better financial performance cross ta bulations do not suggest that the establishments with income sharing schemes had noticeably greater employment growth or better industrial relations copyright 1988 by royal economic society

employment restraining agreements in weitzman s share system abstract weitzman 1983 argues that a profit sharing system would automatically maintain full employment in the face of deflationary shocks this note shows that such a virtuous disequilibrium behavior could be thwarted by the spread of employer employee agreements by which the firm is compensated to temporarily refrain from hiring the unemployed

nominal disturbances wage flexibility and shifting resources in a two sector economy the recent behaviour of european unemployment rates has sparked considerable interest in the connection between wage flexibility and unemployment see for example bruno and sachs i985 and the papers in the i986 supplement to economica much of the empirical work finds that economies adjust more rapidly and with less inflation when wages and prices are very responsive to unemployment this finding supports the belief that greater wage and price flexibility leads to greater macroeconomic stability in fact one can view martin weitzman s i 983 i 984 and i 985 share system as an institutional change aimed at providing sufficient wage and price flexibility to avoid unemployment it is hard to imagine how wage and price flexibility could increase in all sectors of the economy simultaneously instead greater aggregate wage and price flexibility is likely to result from increased wage and price flexibility at particular firms in particular sectors as a result realistic proposals for share systems involve some time perhaps forever when share firms and wage firms would coexist during this period an increase in aggregate flexibility will be associated with an increase in the difference in wage and price flexibility between sectors this paper analyses allocational issues raised by such an uneven increase in aggregate wage and price flexibility the analysis is done explicitly in terms of a short run two sector model where the first sector is a fixed wage sector and the second sector is a share sector the model is short run because both the number of firms in each sector and the pay parameters at all firms are fixed while the explicit analysis is done in terms of share firms in the second sector the model is more general the second sector can be thought of as the flexible sector where wage and price flexibility maintain full employment an important new phenomenon occurs in the mixed system relative prices change in response to nominal disturbances in particular the relative price of the flexible sector falls in response to a decrease in nominal aggregate demand as a result of the change in relative prices both the utilisation of labour and the mix of consumption shift to the more flexible sector in addition the opposite shifting of resources and consumption occurs in response to an increase

labor management bargaining contract curves and slutsky equations consider a firm in which labor and management bargain over division of the firm s organizational rent and negotiate the firm s policy i emphasize the relationship between the bargainer s contract curve and the firm s slutsky equations i can describe a bargaining firm as a hybrid of a neoclassical profit maximizing firm and a pure labor managed firm i apply the methodology to models of employment contracts and identify three separate circumstances in which labor s bargaining power affects the firm s comparative static behavior first there is inefficiency in contractual bargaining second income effects in the worker s utility function interact with the firm s capital cost burden third labor s interest in long term utility maximization need not coincide with management s interest in profit maximization this last case arises from the incompleteness of the market for property rights in the firm

comparative economic performance of conventional and profit sharing firms abstract this paper compares the various economic properties of conventional firms and profit sharing firms the properties contrasted include wage level employment output price total economic rents and industry efficiency the firms operate in an oligopolistic industry with a labor union in general profit sharing firms outperform non sharing firms however there exist counterexamples in which non sharing firms can outperform sharing firms to test the robustness of the results the analysis is conducted for a variety of oligopolistic industries quantity setting pricesetting and joint collusion

profit sharing and employee share ownership profit sharing and employee share ownership saul estrin paul grout and sushil wadhwani this paper evaluates the likely effects of linking a part of a worker s pay to the employer s profits it has been suggested by weitzman that this would raise employment by lowering the cost of taking on an extra worker however this can only happen if existing workers are willing to let their share of value added fall and experience of those firms in the uk who already operate profit sharing schemes suggests that the weitzman mechanism is not operative there is however some evidence that profit related pay does boost productivity but there are other ways of raising productivity such as performance related pay which may be more effective productivity enhancing effects are likely to be greatest when employees are involved in decision making as well but this is likely to undermine the weitzman case still further even if the argument that profit sharing raises employment is not compelling it is sometimes suggested that it can do little harm however there is evidence that it may well be inflationary in which case the government would be advised to proceed cautiously we argue that there is very little case for the introduction of a permanent subsidy to encourage increased profit sharing although there may be a case for a temporary one to overcome managerial inertia however there is a danger that a subsidy will promote cosmetic schemes designed to be eligible for the subsidy but which do not reflect any real change in behaviour

a dynamic model of union membership and employment that it recognizes some link between present wage and employment levels and future membership and that it has an interest in the level of membership attained we model membership decisions with stochastic demand and a differential layoff rate for union and non union workers membership dynamics are behavioural in that membership increases when the utility of being a member exceeds the utility of not being a member the model permits a variety of possible relationships between employment and membership in the adjustment to steady state

drive out fear unless you can drive it in the role of agency and job security in process improvement understanding the wide range of outcomes achieved by firms trying to implement total quality management tqm and similar process improvement initiatives presents a challenge to management theory a few firms reap sustained benefits from their programs but most efforts fail and are abandoned in this paper i study one dimension of this phenomenon the role of impending layoffs in determining employee commitment to process improvement currently the literature provides two opposing theories concerning the effect of job security on the ability of firms to implement change initiatives the drive out fear school argues that firms must commit to job security while the drive in fear school emphasizes the positive role that insecurity plays in motivating change in this study a contract theoretic model is developed to analyze the role of agency in process improvement the main insight of the study is that there are two types of job security internal and external that have opposing impacts on the firm s ability to implement improvement initiatives the distinction is useful in explaining the results of different case studies and can reconcile the two change theories

an economic theory of the open shop trade union there has been significant interest recently both in the empirical investigation of the determinants of trade union membership in the u k and elsewhere and in the theoretical analysis of the economic effects of the closed shop trade union however there is little rigorous microeconomic explanation of union membership which is relevant for much of the u k and similar labour markets where the open shop union is prevalent this paper attempts to overcome the free rider problem of explaining union membership in the open shop we argue that both private pecuniary gains and social influences affect the individuals union membership decisions citing evidence in support of these basic assumptions we show that stable intermediate union density is a possible equilibrium outcome in a generalised social custom model we also analyse the simultaneous determination of wages and union membership deriving a number of comparative static results in particular we find that both wages and union density depend upon inter alia the level of strike pay the net cost of union membership and the individual s sensitivity to social custom and associated solidarity effects we argue that the approach is consistent with various stylised facts concerning both wage bargaining and union membership and is able to explain a number of otherwise puzzling features of union membership

profit sharing unions and investments the pay parameters in a profit sharing system are likely to be determined by collective bargaining between unions and employers in this case employment will not necessarily be higher under profit sharing than under a fixed wage system for a fixed capital stock the most likely case is that profit sharing is better for unions and worse for employers than a fixed wage system with endogenous investments both parties may be worse off under profit sharing than under a fixed wage system this might be one of the reasons why we in fact do not observe much profit sharing under collective bargaining

evolution to equilibrium in an asymmetric oligopoly with differentiated goods abstract we present results on finite population evolutionarily stable strategies esss and stochastically stable states for a model of evolution with an imitative rule of strategy choice in an asymmetric oligopoly with differentiated goods and two groups of firms one group of low cost firms and one of high cost firms the firms play price setting and quantity setting oligopoly games under linear demand functions we will show that the stochastically stable state in a price setting oligopoly and that in a quantity setting oligopoly coincide

on illyrian macroeconomics the ward vanek labor managed economy macro models are found to contain errors in capital pricing treatment which when correct ed removes perverse responses and leads to monetary neutrality vanek s 1977 open model is shown not to be a labor managed econ omy model but rather one of any economy with fixed output a rational e xpectations macro model is developed in which labor managed firms mus t decompose price movement into its nominal and real parts this unce rtainty about the information content of observed prices leads to out put effects similar in spirit to the ward vanek models implications for monetary policy are explored copyright 1988 by the london school of economics and political science

the effect of outsiders on union contracts abstract a recent proposal for incorporating the insider outsider distinction into the static monopoly union model results in implausible comparative static properties this paper presents an alternative formulation that rehabilitates the monopoly union model

profit sharing employment efficiency and wage stability a contract between a risk neutral firm and its risk average workers is considered under uncertainty about product demand we show that profit sharing can be used to attain the efficient level of employment and at the same time preserve optimal risk sharing between the parties optimal profit sharing does not imply wage variability instead wages are stabilized across states

trade unions and seniority employment rules abstract some but not all trade union and insider outsider models assume that a seniority employment rule is used we investigate when firm and union members gain from such a rule and the consequences of their adopting one generally providing a seniority wage scale is also used they gain if union membership is not too large relative to demand and union bargaining power not too great moreover when outsiders are hired under a seniority employment rule employment is at the competitive level these results might explain why bargaining over employment is relatively uncommon and typically occurs only in industries with declining employment

growing unequal changes in the distribution of earnings across canadian cities this paper investigates changes in the distribution of earnings across 87 metropolitan areas in canada it does so using micro data taken from the 20 per cent long form sample of the census for the years 1996 2001 and 2006 results point to overall increases in urban inequality and to greater heterogeneity in inequality across the urban hierarchy with larger cities growing particularly unequal over time cross sectional and panel regression models suggest that city size unemployment deindustrialisation and the percentage of a city s population composed of visible minorities contribute to increased inequality in contrast a city s level of economic development has a mitigating effect on inequality although this effect appears to fade away over time the effects of changes in a city s age education and gender profiles on inequality are mixed

union wages temporary lay offs and seniority it is widely believed that the seniority system in conjunction with the collective bargaining process contributes significantly to the determination of the unemployment level in unionized sectors causa i empiricism suggests that real wage demands often remain buoyant in these sectors in the face of seemingly high rates of unemployment among union members james medoff 1979 p 380 convincingly documents the evidence that adjustment through lay offs is substantially greater in unionized firms than in comparable non unionized firms the usual but somewhat informal explanation is that the outcome of union voting is greatly influenced by senior workers who are fairly certain that they will not be laid off when normal shifts in the industry s demand for labour occur 2 these inframarginal workers are believed to vote for higher wage settlements than they would if their own jobs were not so secure

increasing returns and the foundations of unemployment theory current approaches to macroeconomic theory divide roughly into two basic schools of thought one approach typically associated with rational expectations views the economy as basically at or near walrasian market clearing equilibrium in which case it becomes very difficult to explain away convincingly the undeniable persistence at times of involuntary unemployment another approach views the underemployed economy as being in a state of temporary fixed price disequilibrium in which case aside from having to repress suspicions that the essence of effective demand failure might not have to do with prices fixed at wrong values there is a lot of rationalising to be done about why profitable adjustments are so slow this paper argues that something like an internally consistent theory of steady state involuntary unemployment is possible and even plausible the cornerstone of this third approach is increasing returns to scale which blocks unemployed agents from breaking out of a low level equilibrium trap unless there is overall coordination or stimulation a simple model is presented which contains the basic ideas

a theory of wage dispersion and job market segmentation job market segmentation refers to the idea that there tends to be a correlation among high wages high productivity high capital intensity high value added few quits relative to layoffs and low labor turnover this paper develops a model of wage dispersion and job market segmentation based on the very sparse assumption that the only departure from a strictly orthodox neoclassical world consists of wages being sticky in the short run implications of the model are explored and discussed

using the pareto distribution to improve estimates of topcoded earnings i introduction the public use march current population survey cps is the primary source of data for tracking levels and trends in u s labor earnings and for understanding the factors which influence these trends literatures that have used cps earnings data are vast and include research on the changing returns to education or college major in the labor market autor 2014 gemici and wiswall 2014 earnings differentials across occupations glied ma and pearlstein 2015 earnings volatility hardy and ziliak 2014 elasticity of taxable income burns and ziliak forthcoming and more generally the causes of changes in wage structures and earnings inequality see e g autor katz and kearney 2008 card and dinardo 2002 goldin and katz 2007 juhn murphy and pierce 1993 acemoglu 2002 altonji and blank 1999 and katz and autor 1999 provide reviews of this literature however these literatures that use the public use cps data have been hampered by an attenuated view of the right tail of the labor earnings distribution due to the topcoding of high earnings in the public use cps data 1 importantly the failure to properly correct for inconsistent topcoding has been found to result in biased estimates for a range of outcomes including returns to education hubbard 2011 the size of the earnings gaps between gender and race groups burkhauser and larrimore 2009a the relative economic resources of individuals with and without disabilities burkhauser and larrimore 2009b and population level income inequality burkhauser et al 2012 to correct for topcoding biases public use cps based researchers have generally pursued one of four paths 1 ignoring the topcoding problem 2 making an ad hoc adjustment to topcoded earnings values 3 using a pareto distribution to estimate earnings at the top of the distribution or 4 using cell means or rank proximity swapped data that is based on the still censored internal cps data for example a common ad hoc technique based on estimates from pareto imputations of top earnings is to replace topcoded earnings with a multiple of the topcode threshold so all individuals with topcoded earnings in a year are assumed to have earnings at 1 3 1 4 or 1 5 times the topcode threshold autor katz and kearney 2008 juhn murphy and pierce 1993 katz and murphy 1992 lemieux 2006 however such an approach may misstate top earnings if the wrong multiple is used or if the appropriate multiple changes over time similarly researchers using a pareto imputation of top earnings may misstate those earnings if they are unable to obtain a reasonable fit for the pareto distribution when using available public use data making use of internal march cps files with their much higher censoring levels we show that previous ad hoc estimates and pareto estimations of top earnings based on public use data understate mean earnings at the top of the earnings distribution and hence also understate earnings inequality however as this internal data are also censored albeit at higher levels any results based purely on the internal data will also fail to capture a portion of the income at the very top of the distribution and therefore will also understate inequality hence while cell means based on internal data such as those produced by larrimore et al 2008 and the rank proximity swapped data series which the census began providing in 2010 each allow researchers to replicate results from the internal census data findings using these series will be subject to the same limitations and understatement of true top incomes as the internal values recognizing the limitations of the existing options to correct for topcoding we proceed by using a continuous maximum likelihood estimator along with internal cps data to produce a series of more accurate estimates of top earnings in the cps data our estimates start with actual top earnings from the internal cps combined with a pareto estimate using these data for internally censored observations

recent trends in top income shares in the usa reconciling estimates from march cps and irs tax return data although the majority of research on us income inequality trends is based on public use march cps data a new wave of research using irs tax return data reports substantially higher levels of inequality and faster growing trends we show that these apparently inconsistent estimates are largely reconciled if the inequality measure and the income distribution are defined in the same way using internal cps data for 1967 2006 we closely match irs data based estimates of top income shares reported by piketty and saez 2003 our results imply that any inequality increases since 1993 are concentrated among the top 1 percent of the distribution

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

on weitzman s recession resistant employee compensation arrangements abstract this note presents a slight modification of the alternative pay systems discussed by weitzman 1983 the modification preserves the recession resistance property yet guarantees that the workers already in the firm will not become worse off by the conversion to the new pay system even when no other firm converts to it

unionized contracts with fixed wage rates and state contingent employment levels a union sets a state independent wage the firm sets employment along the state contingent demand for labor curve the union s maximand is the welfare of its cu rrent members however it sets a wage at which outsiders are recruit ed in good states so as to protect insiders employment prospects in bad states if these newly recruited workers join the union there m ay exist an equilibrium membership comparative statics results are o btained for government policy measures copyright 1988 by the london school of economics and political science

truncation bias and the measurement of income inequality 1988 truncation bias and the measurement of income inequality journal of business economic statistics vol 6 no 3 pp 335 337

optimal trade policies for a small open economoy this paper investigates optimal trade policies for a small open economy with unemployment when factor prices are rigid random foreign prices result in random unemployment of resources the ranking of second best policies is investigated if the marginal propensity to consume the importable is positive and nonincreasing in income the optimal composite tariff dominates the optimal target price which in turn dominates the optimal quota copyright 1993 by the london school of economics and political science

truncation bias and the ordinal evaiuation of income inequality lorenz dominance analysis is used to examine the effect of top coding on the ordinal evaluation of u s income inequality across time current population survey microdata are adjusted for truncation bias and statistical inference procedures are used to examine biennial changes in unadjusted and adjusted lorenz curves beginning in 1985 the truncation bias has a significant effect on ordinal rankings of income inequality

the effects of profit sharing on employment wages stock returns and productivity evidence from uk micro data this paper provides evidence based on u k firm level data that 1 the authors cannot reject the view that profit sharing firms view the total level of remuneration as the marginal cost of labor which is contrary to much of weitzman s analysis 2 there is some support for the popular view that profit sharing raises total remuneration and can therefore be inflationary and 3 the introduction of profit sharing does lead to higher productivity but this combined with the employment reducing consequences of 2 leads the authors to conclude that the net employment effect is small and uncertain copyright 1990 by royal economic society

labor supply constraints profit sharing and volatility rents in an unstable economy i introduction since the end of the 1930s the portion of u s national income claimed by wages and salaries has been in the low sixty percents fluctuating between a low of 60 3 percent in 1942 and a high of 66 2 percent in 1970 the average has been slightly below 63 percent over this interval obviously we cannot know what the share distribution would have been had the economy traversed a perfectly smooth equilibrium growth path but does the observed long term average provide an unbiased estimate of long run equilibrium the question arises in the context of recent suggestions by martin weitzman 1984 and james meade 1986 and others that a move away from fixed wage contracting would reduce cyclical unemployment an oft cited consequence of the convexity of profits in output prices is that in the absence of adjustment costs price stabilization will reduce the long term average profits of firms 1 this is possible because the residual claimant retains the option of adjusting the level of operations in response to business conditions it is therefore interesting that profit sharing for the sake of macroeconomic stability has sometimes been recommended as distributionally neutral or isomorphic in its long run equilibrium properties 2 since profit sharing dilutes profit s claim on the residual share by giving labor a part we ask in this paper whether firm owners must thus give up the aforementioned rents to volatility the euler walras concept of a general equilibrium applies to an imaginary steady state of the economy in which all prices have settled down to their market clearing levels 3 marginal productivities determine the functional distribution of a constant overall income but in fact it is only appropriate to use the euler walras shares as the focal point around which cyclical forces influence the income shares if every characteristic of an economy in recession is symmetrically reversed under boom conditions full symmetry would require that firms be free to increase employment in good times to the same extent that they can reduce their employment levels in slack times this marks a very important distinction between the micro economics of fully competitive input markets and the macroeconomics of the business cycle if a cleared labor market is part of the definition of the walrasian equilibrium then any increase in boom state hiring must be limited by the elasticity of the overall labor supply in the aggregate this elasticity must be far from infinite this will be true whether we view workers as utility maximizers balancing income against leisure or as being forced at a corner solution to simply choose between employment and unemployment there is no equivalent limit short of the whole labor force to the number of workers who can be cut loose by the firm in a recession we construct here a very simple partial equilibrium model of a representative cobb douglas firm which is macroeconomic in the sense that labor constrained booms are assumed to alternate with recessions the firm is free to hire the optimal amount of labor within its labor supply constraint but is not free to alter labor contracts over the business cycle contracts are consistent with a cleared labor market only in the long run steady state 4 in the boom state of the economy the firm under fixed wages is able to obtain the full benefit of the gap which develops between the revenue product of labor and the wage if on the down side of the cycle unemployment is avoided by the use of profit sharing contracts the firm must sacrifice part of these benefits and more than 100 percent of the gains from the saved output may go to labor s share to the extent that these arguments apply in vivo their analytical validity can be demonstrated for a wide range of models more doubt is cast upon the distributional neutrality of profit sharing contracts but we might also question the basic nature of the fixed wage system