Employee Profit-sharing and Labor Extraction in a Classical Model of Distribution and Growth

This article sets out a classical model of economic growth in which the distribution of income features the possibility of profit-sharing with workers, as firms choose periodically between two labor-extraction compensation strategies. Workers are homogeneous with regard to labor power, and firms choose to compensate them with either only a conventional wage or a share of profits on top of this conventional wage. Empirical evidence shows that labor productivity (i.e. labor extraction) in profit-sharing firms is higher than labor productivity in non-sharing firms. The frequency distribution of labor-extraction employee compensation strategies and labor productivity across firms is time-variant, being driven by satisficing imitation dynamics from which we derive two significant results. First, heterogeneity in labor-extraction compensation strategies across firms, and hence earnings inequality across workers can be a stable long-run equilibrium outcome. Second, although convergence to a long-run equilibrium may occur with either a falling or increasing proportion of profit-sharing firms, the share of net profits in income and the rates of net profit, capital accumulation and economic growth nevertheless all converge to the highest possible long-run equilibrium values.