Macroeconomic Implications of Alternative Compensation System: With Emphasis on the Profit Sharing System (Written in Korean)

• Main Author: 전, 성인
• Format: Article
• Language: English
• Published: Korea Development Institute 1991-10-01
• Series: KDI Journal of Economic Policy
• Online Access: https://doi.org/10.23895/kdijep.1991.13.3.75

From a firm's point of view, profit sharing is like paying profit taxes and then receiving subsidies whenever the firm hires additional workers. As for workers, it works differently. Workers share a part of higher gross profit in addition to base wages. Firm's gross profit is higher because of low base wages and possibly higher labor productivity. Profit sharing has both positive and negative effects on the performance of an economy as a whole. The positive aspect is that profit sharing lowers the marginal labor cost, resulting in the lower price level and higher output. There are also several negative aspects. Firstly, lower marginal labor cost tends to increase the demand for labor, usually to the level where excess demand for labor is a rule rather than an exception. Secondly, contrary to commonly held beliefs, workers' incentives to increase labor productivity may be weak because the performance gain, obtained by the increased effort of a worker, has to be shared by all workers who may or may not work hard. The last but not the least point is that risk-averse workers may be worse-off since their labor income fluctuates depending on the firm's performance. In order to maximize the benefits of profit sharing while minimizing its negative effects, much care has to be paid. The minimum requirements are: (i) Workers' participation to firm's management and decision making process should be enlarged; (ii) The government should provide strong tax incentives in order to encourage firms' adoption of the system; (iii) The government should pay more attention to stabilization policy to dampen unnecessary fluctuations of income.