Gaëtan Fournier: gaetan.fournier[at]univ-amu.fr
Yevgeny Tsodikovich: evgeny.tsodikovich[at]univ-amu.fr
I show theoretically and empirically that an important reason for firms to pay workers through profit sharing is to weaken their unions. I do that by first documenting a series of stylized facts that support this hypothesis with a new data set on French firms. 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 one revisits an intuition Hicks had about strikes as the “weapon” that unions use to build reputation for being strong. The second is the effect that profit sharing has on unions. By making employee compensation depend on output, unions internalize the cost of their strikes and are less inclined to organize collective actions. This in turn damages the credibility of their strike threats. Over time unions lose reputation and bargaining power and as a result wages grow more slowly. Third, I test the model which predicts that firms increase their usage of profit sharing when unions are more likely to organize strikes. For that I use arguably 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 by about 12 percent the year after. The effect is heterogeneous and concentrated on lower skilled employees for whom wage growth is almost halved. It is driven by a reduction in the bargaining power of unions which are less likely to conclude wage agreements with employers.