Profit Sharing and Employment Stability

We investigate the effect of profit sharing on establishments' hirings, layoffs, and quits. Our principal argument is that profit sharing increases wage flexibility and also aligns wages with a changing marginal revenue product. Because employment stability makes their human capital investment more profitable and increases labor productivity and morale, firms might choose to adopt profit-sharing schemes. Our empirical analysis is based on the IAB Establishment Panel. We estimate cross-section time-series regressions and apply state-of-the-art matching estimators that explicitly account for observed and unobserved heterogeneity. In the regressions we find a significantly positive effect of profit sharing on hirings and a significantly negative effect on layoffs, but the results obtained by the matching estimators are not significant