Can Committed Profit Sharing Lower Flexible Outsourcing?

We analyze the impact of committed profit sharing for low-skilled workers on the amount of international outsourcing, if there is a bargaining between a firm and a labor union. In this bargaining round, the parties negotiate over the wage and provided effort. Here, we find that effort is independent of the bargaining power, profit sharing and wage. We further find that, in general, profit sharing leads to a substitution effect, which results in a decreased low-skilled wage and can therefore be an instrument to lower the demanded amount of outsourcing. For the optimal profit share, we find that it depends on the bargaining power of the union. The firm desists from such a remuneration scheme if the union is too strong. In contrast, if the firm is strong enough, the implementation becomes beneficial.