Elio Nimir-David
Elio Nimier-David
Postdoctoral Fellow, University of Chicago Booth School of Business
Profit-sharing incentives are a common practice in countries around the world. For example, in Canada, employers can create a deferred profit-sharing plan where the company provides tax-free contributions based on profits, and employees are exempt from federal taxes until they withdraw funds from the plan. Other countries have also adopted mandatory profit-sharing schemes. For example, in Mexico, the Employee Participation Company Profit Plan requires companies with more than $15,000 in employee sales to share 10% of profits with employees. These profit-sharing programs are part of a package of policies aimed at raising workers' rents in the labor market. For policymakers, these policies have attracted more attention as concerns about declining workers' power have intensified.
For policymakers, these profit-sharing schemes raise two important questions: Do they really benefit workers? Do they help increase business productivity? Academia has struggled to answer these questions. It's hard to find reliable, enterprise-level profit-sharing data. In addition, to determine the causal impact of these policies on wages or productivity, it is necessary to compare companies with profit-sharing plans with similar firms that do not. But in reality it's hard to do. If a profit-sharing policy is voluntary, then it is likely that companies that adopt such policies will be fundamentally different from those that do not. If a profit-sharing policy is mandatory, it must be adhered to by all businesses, so there is no obvious comparison group.
Theoretically, the effect of profit-sharing policies is ambiguous. First, companies can offset the impact of profit-sharing policies by reducing wage growth, thus keeping total worker compensation unchanged. Whether companies can use profit-sharing as an alternative to wages is key to understanding the impact of these policies on overall worker compensation.
Second, the impact of profit-sharing on productivity is not obvious. On the one hand, for workers, profit-sharing is only a small part of total compensation, and the impact of individual efforts on the company's profits may be limited, which weakens the incentive effect. On the other hand, profit-sharing can soothe labor-management relations, allow workers to get a share of the profits, and make the goals of employees more consistent with the healthy development of the enterprise. For example, workers may be more willing to support organizational change if they can get a direct share of the surplus generated.
Mandatory profit-sharing in France
In 1967, Charles de Gaulle introduced a mandatory profit-sharing system in France, requiring companies with more than 100 employees to redistribute a portion of their "excess profits" (profits in excess of 5% of the company's share capital) to employees. This legal requirement means that shareholders are subject to a huge tax, which averages 13% of annual profits. The profits shared through the program will be paid to all employees of the business, mostly in proportion to their salaries.
The profit-sharing system was introduced after a series of social reforms implemented after World War II, including social security, universal health care, and employment protection laws. It was presented as a third way between capitalism and communism: a tool to increase workers' compensation while reducing intra-company conflict and aligning workers' goals with company performance. Tax incentives for workers (no income tax if held in a special savings account for at least five years) and enterprises (no payroll tax, deducted from the corporate income tax base) facilitated the adoption of the reforms.
In 1990, the left-wing French parliament voted to expand the coverage of mandatory profit-sharing, lowering the eligibility threshold from 100 employees to 50. We use this reform as an experiment to study the effects of profit-sharing. First, we studied the behavior of a company with about 100 employees. Second, this reform creates a natural comparison group, thus solving the identification problem discussed above: we can see the effect of profit sharing by comparing firms with 50~100 employees ("new processing") with enterprises with fewer than 50 employees ("never processing") or enterprises with more than 100 employees ("always processing").
The law has been amended several times and is still in force today. In 2019, about 40% of the workforce received some profit-sharing, averaging 1,500 euros or 3.8% of wages. This makes France the second highest percentage of workers in Europe who enjoy such programs.
Impact on workers' compensation
While one of the main goals of profit-sharing policies is to redistribute profits from shareholders to workers, businesses may try to circumvent the costs of these policies by substituting a base salary for profit-sharing. Tax incentives for profit-sharing over wages further encourage this substitution.
Our analysis further shows that mandatory profit-sharing does not benefit all workers equally: for highly skilled workers, such as managers and engineers, profit-sharing causes their base wages to fall, so these workers benefit little from mandatory profit-sharing policies. We explore two potential mechanisms that lead to these outcomes. One explanation may have to do with risk: if workers are risk-averse and profit-sharing is a more volatile form of compensation than wages, then workers may simply be less valuable to profit-sharing. Our analysis suggests that this is unlikely to be the case, as profit sharing only slightly increases the variability of revenue in the data.
Another, more plausible explanation is the rigidity of wages for low-skilled workers. Due to the high minimum wage in France, a large part of the wage changes for low- and middle-income workers are caused by annual changes in the minimum wage. Conversely, when negotiating with highly skilled workers, profit-sharing can be used to fight for lower wage increases (at least real wage increases).
Original link:
https://cepr.org/voxeu/columns/effects-mandatory-profit-sharing-workers-and-firms-evidence-france
(Chang Changsheng/excerpt)
The above views and remarks do not represent the position of this platform.
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