UCLA

This dissertation consists of three essays on the usage of profit sharing compensation schemes by firms. I show theoretically and empirically that an important reason for firms to pay workers through profit sharing is to weaken their unions. I also analyze how taxation affects the usage of profit sharing and can mitigate its undesirable effects on wage growth and income inequality.

In Chapter 1, I document a series of stylized facts regarding the usage of profit sharing. Both profit sharing and the presence of unions increase with firm size, firms with unions are more likely to resort to profit sharing, while strike incidence decreases with its usage. Second, I develop a model to study the effects of profit sharing on union behavior which introduces two novel mechanisms. The first is that strikes are a tool that unions use to build reputation for being strong.

The second is that profit sharing weakens unions. By making employee compensation depend on output, unions internalize the cost of their strikes and are less inclined to organize collective actions. Over time unions lose reputation and bargaining power, and as a result wages grow more slowly.

In Chapter 2, I test the model which predicts that firms increase their usage of profit sharing when unions are more likely to strike. For that I use exogenous dates of elections of union representatives, which give incentives for unions to organize collective actions in a competition for voters. I show that employers anticipate the effect of elections by increasing their usage of profit sharing, which payment leads to a reduction in strike length the same year, and to a drop in wage growth the year after.

The effect is heterogeneous and concentrated on lower skilled employees for whom wage growth is almost halved.

In Chapter 3, I analyze the effects of taxation of profit sharing and wages on the income and welfare of individuals. Wage taxation reduces the bargaining power of unions and helps achieving efficiency through reductions in strikes, while profit sharing taxation is better suited for reducing income inequality. Profit sharing taxation can have additional effects on individual welfare in economies with social security systems where pensions revenues come from wage taxation and profit sharing constitutes an additional source of retirement income. Subsidies to profit sharing can reduce fiscal revenues by reducing wages, and lead to smaller pension benefits. Depending on the allocation of profit sharing across employees the subsidy can exacerbate its negative effect on income inequality by reshuffling retirement income across individuals.