Profit Sharing as a Bargaining Weapon Against Unions

There is no consensus among economists about the reasons why firms resort to profit sharing compensation, especially in larger firms. This paper presents evidence for France showing that firms with unions are more likely to resort to profit sharing than those without and, moreover, that strike incidence decreases with its usage. Inspired by these stylized facts, I develop a model to study the effects of profit sharing on union behavior that introduces two novel mechanisms. First, by making employee compensation depend on output, profit sharing makes unions internalize the cost of their strikes so that they are less inclined to organize collective actions. This in turn damages the credibility of their strike threats. Second, over time unions lose reputation, which further reduces their bargaining power. Lastly, I test the model using exogenous dates of elections of union representatives that give incentives for unions to organize collective actions in a competition for voters. I show that employers anticipate the effect of elections by increasing the usage of profit sharing. Its payment leads to a reduction in strike length the same year, and to a drop in wage growth by about 13 percent the year after. The effect is concentrated on lower occupations for whom wage growth is almost halved and driven by a reduction in the bargaining power of unions.