Profit Sharing and Outsourcing under Labor Market Imperfection

Authors

  • Jan König,

    Corresponding author
    1. School of Business & Economics, Freie Universität Berlin, Boltzmannstr. 20, 14195 Berlin, Germany
    Search for more papers by this author
  • Erkki Koskela

    Corresponding author
    1. Department of Economics, P.O. Box 17 (Arkadiankatu 7), 00014 University of Helsinki, Finland
    Search for more papers by this author
    • The authors thank an anonymous referee for valuable suggestions to improve the paper. Erkki Koskela thanks Freie Universität Berlin for great hospitality and Jan König thanks University of Helsinki for great hospitality. Koskela also thanks the Academy of Finland (grant No. 121 7622) for financial support.


König: School of Business & Economics, Freie Universität Berlin, Boltzmannstr. 20, 14195 Berlin, Germany, Tel: +49-30-83851242, Fax: +49-30-83851245, E-mail: jan.koenig@fu-berlin.de; Koskela: Department of Economics, P.O. Box 17 (Arkadiankatu 7), 00014 University of Helsinki, Finland,Tel: +358-9-19128757, Fax: +358-9-19128736, E-mail: erkki.koskela@helsinki.fi.

Abstract

When the wage rate is set by the labor union, profit sharing and outsourcing is combined in this paper to analyze how the implementation of profit sharing affects individual effort and wage and thus outsourcing. The findings show that profit sharing and wage have an individual effort-augmenting effect and therefore increase productivity. It is also found that the wage effect of profit sharing in general is ambiguous. There is a wage decreasing substitution effect, but in contrast, there is a wage increasing effect via labor demand elasticity and effort so that outsourcing and employment effects are also ambiguous. Furthermore, it is shown under which condition a firm will implement a profit sharing scheme.

Ancillary