Commentary: Should businesses have to share profits with employees?

NASTY UNINTENDED CONSEQUENCES

Shareholders worried about a raid on their profits might warn of some nasty unintended consequences. Any tax advantages, as exist in France, will cost the Treasury. (The British government ditched a voluntary “profit-related pay” scheme in the 1990s after it became a vehicle for tax avoidance.)

And businesses can always cut wages, leaving employees with income that is more volatile but no higher. Lower retained profits could crimp investment. Or, as with any regulation, companies might contort to avoid paying up.

In Mexico, where profit-sharing is a constitutional obligation, contortion has been common. Rafael Avante, a Mexican labour lawyer, explains that historically companies have avoided regulations by using informal labour as well as hiring workers through subsidiaries.

The latter in effect protects the parent company’s profits. The government recently tried to ban bogus subcontracting, at which point employers demanded a cap on any profits to be shared.

In France, there have been distortions too. Their scheme requires big companies to share a fraction of “excess” profits with workers, defined as those above 5 per cent of equity value. In 2019, around two-fifths of the workforce got payouts.

But as a new working paper finds, in the late 1980s when only companies with more than 100 employees were affected, there was a suspicious cluster of businesses around that threshold.

That study also assesses the effects of a French reform in 1991, which expanded the law’s coverage to businesses with 50 to 99 employees. They compare the newly affected companies with those below and above the new and old thresholds, and so can isolate forced profit-shifting’s effects.

David Sraer of the University of California, Berkeley, one of the authors, was surprised to find that investment did not drop in the affected companies. Disappointingly, productivity didn’t rise either. And happily, on average the affected workers did seem to benefit from higher income. Four-fifths of that was paid for by shareholders. Taxpayers funded the rest.