Profit Sharing: Worth Another Look


February 18, 1993|By TRB

WASHINGTON — Washington.--In 1984, an MIT economist named Martin Weitzman published a short book called ''The Share Economy.'' The book made a new argument for an old economic reform, profit-sharing.

Partisans of profit-sharing had traditionally argued that if workers have a stake in an enterprise, they will be more productive. Mr. Weitzman advanced a more ''hard-boiled'' rationale. He claimed that profit-sharing was nothing less than the solution to the riddle of how to achieve full employment without inflation.

Mr. Weitzman contrasted the behavior of two sorts of business enterprises. Traditional companies pay workers straight wages. ''Share'' companies pay workers a lower ''base'' wage, plus a large bonus that varies with profits. When recession hits, how do these firms react? Unable to cut wages, a traditional firm might lay off 10 percent of its workers, contributing to a recessionary cycle of lost jobs, lost production, lost consumer demand and more lost jobs. But at a ''share'' company, everyone's bonus would automatically be lowered. There would be no need for layoffs or lost production.

Indeed, a ''share'' firm would still want to hire new workers, as long as they added enough revenue to cover their ''base'' pay. Profit-sharing employers, Mr. Weitzman said, would cruise around ''like vacuum cleaners on wheels, searching in nooks and crannies'' for unemployed Americans to hire.

Mr. Weitzman's theory made a big splash. A New York Times editorial called it the ''Best Idea Since Keynes.'' It was promoted by Charles Robb, then governor of Virginia and a presidential hopeful who chaired the Democratic Leadership Council. Former Arizona governor Bruce Babbitt said, ''It's one of those very infrequent, large, large concepts that I intend to develop.'' Gary Hart sponsored a seminar on the subject, and Sen. Dale Bumpers introduced a bill to encourage profit-sharing with a tax break.

And then . . . nothing. Senator Bumpers' bill went nowhere. The Democratic Leadership Council eventually elected one of its chairmen president, but his name was Clinton, not Robb. Clinton's campaign tract, ''Putting People First,'' doesn't mention profit-sharing, and for that matter neither does ''Mandate for Change,'' the DLC's would-be Clinton agenda.

What happened? Three factors seem to be at work.

First, Mr. Weitzman's book addressed a particular economic problem, the persistence of inflation despite high unemployment ''stag- flation.'' The recession of 1982 ended the inflation, but economists expected it to revive when the economy did. That didn't happen, in part because wages failed to rise much when the job market tightened. Unions became more timid, companies more aggressive. But this had more to do with the breaking of the air-controllers union, PATCO, than with profit sharing. Something else solved the stagflation problem.

Second, as Mr. Weitzman notes, profit sharing ''doesn't have a constituency.'' Businesses don't want the government telling them how to pay their workers. Unions don't like the plan either. Yes, if it worked as advertised it would employ millions of people who would otherwise be out of a job. But it would also force high-seniority union members to trade generous fixed wages for lower, variable wages.

Third, and most important, Mr. Weitzman has had to tone down his claims. In ''The Share Economy,'' he pointed to Japan, where about a fourth of industrial workers' pay comes in the form of twice-yearly bonus payments. Japan is the industrial economy that has most successfully tamed the business cycle. Surely profit sharing had a lot to do with this, Mr. Weitzman argued.

But then he and economist Richard Freeman studied Japan closely to estimate the percentage of pay that actually varied with profits. The answer wasn't 25 percent. It was more like 3 percent. Mr. Freeman admits this finding was ''a little depressing.'' Japan's workers, it seems, don't tolerate anywhere near the degree of uncertainty in their pay that would be required to create a full-fledged Weitzman Effect.

None of these factors, however, justifies abandoning the profit-sharing idea. It will still help.

A study to be published by Rutgers economist Douglas Kruse shows that employers tend to impose fewer layoffs after switching to a profit-sharing system. Mr. Freeman thinks that even were the U.S. merely to match Japan in the amount of FTC compensation that varies with profits, the payoff would be large. ''[I]f 2 to 3 percent of our wage bill were more variable [through profit-sharing] it would probably create 1 or 2 percent more jobs.''

One or two percent more jobs is the sort of difference elections turn on. True, profit-sharing won't produce all these jobs, at best, for many years. But neither will the ''investments'' in Head Start and fiber-optical ''infrastructure'' that President Clinton is touting.

Indeed, profit-sharing is a Clin- tonesque idea if there ever was one. It seems post-ideological, yet vaguely populist. It is slightly gimmicky. It ''challenges'' America to ''change,'' calling on both labor and management, as Mr. Weitzman notes, to ''look at risk differently.'' It also might make a big difference for the better.

How about it?

TRB is a column of The New Republic, written by Mickey Kaus.

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