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~Presented by

Aakanksha Vats (061)

Hri ni ya Bose (107)
Bal aj i . S (148)

~Davi d G. Bl anchfl ower
Andrew J. Oswal d

Davi d G. Bl anch f l ower

Leadi ng Labor economi st , cur r ent l y at
Pr of essor at Dar t mout h Col l ege, New
Hampshi r e.

Ar eas of r esear ch : unempl oyment ,
wel l - bei ng, and wage macro pol i cy;
wr i t ten extensi vel y on wages,
unempl oyment , especi al l y yout h
unempl oyment , sel f - empl oyment , cr edi t
const r ai nt s, and wel l - bei ng.

The Wage Cur ve ( 1994, MI T Pr ess) , co
aut hor ed wi t h Andr ew J. Oswal d, was
awar ded Pr i nceton Uni ver si t y' s Ri char d
A. Lester Pr i ze f or t he Out st andi ng
Book i n I ndust r i al Rel at i ons and Labour
Economi cs.

Andr ew J . Oswal d

Pr of essor of economi cs at Uni ver si t y
of War wi ck, UK.

Resear ch ar eas: Appl i ed Economi cs,
Quant i t at i ve Soci al Sci ence and al so
Seven mai n ar eas ( t r ade uni ons,
l abor cont r act s, t he wage cur ve,
ent r epr eneur shi p, home owner shi p,
and unempl oyment , t he
consequences of hi gh oi l pr i ces and
t he economi cs of happi ness and
ment al heal t h) .

Severe di screpanci es observed i n the Wage System where empl oyees
are pai d fi xed wages and unempl oyment fl uctuates severel y.

Adopti ng Remunerati on method to i ntroduce fl exi bi l i ty i n the pay.

Two ways suggested:
Link wages to profits using Cash-Based Profit Sharing (cash payments that
vary with employers profitability)
Workers to be paid partly from firms own shares (ESOP)

Addi ti on: Producer Cooperati ves where workers parti ci pate i n profi ts,
ownershi p and deci si on maki ng. It i nvol ves workers accepti ng
greater degree of market ri sk.

( Source: The Economi c Ef f ect s of Pr of i t Shar i ng i n Gr eat Br i t ai n~ Davi d G.
Bl anchfl ower )
Martin Weitzman, cruci al contri butor i n the area of
remuneration systems based partl y on profi t sharing.
Belief: Workers wage to be associated with employers profit levels

Three ways to make a macroeconomic case for profi t sharing:

The Morale and Productivity argument

The Wage Flexibility argument

Weitzmans Macroeconomic argument


Pri nci pal i dea: Create the Constant Excess Demand for Labor.
Assumption: Si mi lar on the l i nes of shortage of goods, there
woul d be dearth of l abor forces.
How do we create the economy where shortage of l abor
exi sts?
Make Labor extremely cheap, which would increasing the hiring

Weizmann s Sol ution: Remuneration to be sum of two
Component 1: Base wage paid under normal remuneration system
Component 2: Profit-related amount share which is per capita profit
earned by the company
Weitzmans Macroeconomic argument
Sharing Economy concept : Success l i es onl y i f the base pay i s
suf fi ciently l ow so that fi rms are unable to fi nd as many
employees as they woul d l i ke.
Unemployment would disappear in this arrangement

Rati onale for profit sharing: Ei ther i nduce wage fl exibility or
rai se productivity by changi ng worker s atti tude.

Weitzmans Macroeconomic Argument
Si mi lar to Weitzman approach
It says, If shari ng remuneration system turns out to be
successful, fi rms won t sack workers as they wi l l have l ess
i ncenti ve to do so.

Example: Sal esperson worki ng on contract whi ch says the
person woul d recei ve hal f of any profi ts the company makes.
In case of reduction of sal es won t make the sal esperson
enti tl e to l ose the j ob.

The Wage Flexibility Argument
Introduction of profi t shari ng pol i cy mi ght encourage each
i ndi vidual to work harder as the ef fort mi ght i mpact the whol e
organi zation s productivity. (for smal ler organi zations)

Thi s mi ght not work for the l arge organi zations as the ef fect i s
mi ni mal on thei r gai ns, coul d never af fect the company s profi ts.

The onl y way to counter the above poi nt woul d be i f there i s an
atti tudinal change i n the behavior of the workers af ter the
i mpl ementati on of the profi t shari ng scheme.

If the i ndi viduals do not behave i n a rati onal or sel fish way,
chances are hi gh to i ncrease the productivity.

The Morale & Productivity Argument
1. Shari ng Programs expose workers to a si gni fi cant amount of
i ncome ri sk. (i gnored by al l the approaches, but vi tal to al l the
i ncome shari ng arrangements)
2. Under profi t shari ng, Current workers wi l l wi sh to prevent the fi rm
to hi re the extra i ndi vi dual s as i t woul d affect thei r remunerati on.
3. Need to subsi di ze the profi t shari ng deal ?
4. Wei tzman s argument: "excess demand for l abor i s not very much
practi cal .
5. Practi cal Obj ecti ons: If wage system i s effi ci ent, cosmeti c shari ng
schemes may grow up.
6. Uni ons i n agreement to profi t shari ng woul d l i ke some control of
the workpl ace, woul d assume the rol e of partners i n the
enterpri se.
7. It seems undesi rabl e to encourage workers to i nvest i n thei r own
fi rm s shares as thei r human capi tal i s al ready ti ed up i n the
enterpri se.
Theoretical Objections
Profi t Shari ng i mplementati on:
Sam Waltons Rule #2 : Share Success with those who have helped you.
(Walmarts 10 rules for building a Business)

Associate Profit Sharing to propel Walmarts Rocket to Success.

Profit Sharing Plan & the Associate stock purchase plan had resulted in associates
becoming the owners of Walmarts Stock.

Sam Waltons philosophy: Individuals dont win , teams do! and for Walmart to
succeed required the efforts from everyone on the payroll.

Profit Sharing at Walmart resulted in the team of highly motivated and loyal business
partners, adding to that Walmart found its place at the top of the Fortune 500 list.

Jack Stack, CEO of Spri ngfield, Mi ssouri, based
remanufacturer SRC Hol di ngs on profi t shari ng: Bonus pl an
si mi lar to a cash profi t shari ng pl an.

Allocation of a slightly different maximum for hourly and salaried

Distribution of profits usually occurs annually, but not always.

the company distributes quarterly, which serves as a more
immediate reminder of the benefits of the program for employees.

Profit Sharing implementation:
Empirical Evidence
1. Profi t Sharing

2. Empl oyee Share Ownership

In Uni ted Ki ngdom - Fi nance Act 1972- 1985
3 ki nds of Empl oyee Share Scheme whi ch attracts Tax rel i ef

1. Share Schemes i ntroduced i n 1978 Fi nance Act covering al l
2. Savi ngs rel ated share opti on schemes for al l employees i n
1980 Act
3. Di scretionary share opti on schemes i n 1985 Act

Important i n chemicals, retail food, mi ni ng, quarrying &
construction, pri nti ng & banki ng
Unusual i n shi pbuildi ng, tel ecom & paper

Quantifiable Research

Bl anchflower & Oswal d To veri fy i f share ownership
schemes have beneficial ef fects on empl oyment and
i nvestment.

Estri n & Wi lson Introduction of profi t shari ng i ncreased
employment i n sample fi rms by 13%. Remuneration i n
theses fi rms were on average 4% l ower than others

Ri chardson & Nej ad Compani es whi ch i ntroduced the
scheme had 5% hi gher share appreciation than those that
di d not.

Qualitative Research

Wal lace & Hanson Profi t sharing si gni ficantly i mproves
employee atti tudes & vi ews of the company

Wi der Share Ownership Counci l Has resulted i n employee
l oyalty or atti tudes

Ef fects of scheme on productivity, staf f turnover, recruitment
i s present but sti l l uncl ear