A recent NBER working paper (The Effects of Mandatory Profit-Sharing on Workers and Firms: Evidence from France by Elio Nimier-David, David Sraer & David Thesmar) examines France’s mandated profit-sharing scheme. This scheme obligates large firms to share excess profits with employees. But a few questions arises: are companies finding loopholes? who actually benefits from profit-sharing?
The big picture
The profit-sharing mandate was designed to redistribute earnings among employees. It targets firms that exceed certain employment thresholds. A significant change occurred in 1991. During that year, the threshold was reduced from 100 to 50 employees.
- Ducking under the limit: Some firms hover around the 50-employee threshold. These firms appear to modify their employment numbers to sidestep the rule. The data indicates a trend. Firms with 46 to 56 employees tend to stay below the 50-employee mark, primarily when the law is enforced.
- Other evasion methods: The research sheds light on income manipulation. It suggests minimal evidence that firms adjust their income to show reduced or zero excess profits. Thus, changing employment remains the main evasion tactic.
- Impact on Profit Sharing: The scheme offers tax benefits. However, it also introduces a financial challenge for firm owners, having them focus less on profit generation. Before the 1991 change, many firms grouped just under the 100-employee threshold.
- Business Impact: Owners face a cost. It amounts to around 10.5% of pre-tax income in firms with positive excess profits. Yet, this doesn’t impact a firm’s productivity or investment decisions.
- Compensation Dynamics: The mandate’s influence is curious. It doesn’t affect the average wages of employees. But it does uplift total compensations. Why is this? Firms find it difficult to swap wages for profit-sharing. This is particularly true for low-skilled workers. Their wages are rigid at the bottom of the skill range.
- Skill Level Disparities: Professionals with higher skills face a change. Roles like managers and executives see a decrease in wages. This decrease aligns with their profit-sharing amounts. On the other hand, low-skilled workers remain unaffected by their basic wages because of wage rigidity. Low-skilled workers benefit entirely from the profit-sharing scheme.
The bottom line
Mandated profit-sharing has a clear role. It serves as a mechanism for wage redistribution, which may be helpful with other policies to ensure growing real wages. It moves wealth from firm owners to their lower-skilled workers. And it does this without altering firms’ operational behaviors.