An evaluation of blinder's alternative to profit sharing

Abstract

Blinder has suggested that wages be partially tied to a firm's own price change, so that the key feature behind Weitzman's profit-sharing proposal might be created without the same need for fundamental institutional change. We examine whether this proposal for labor's remuneration yields the “better disequilibrium properties” that Weitzman expects from this class of policies. Using a standard quadratic adjustment cost model, we find that a tax-based indexing incentive is equivalent to there being a decreased degree of wage flexibility. We then examine output variability within a conventional macro model, while trying to avoid the Lucas critique by continuing to use the underlying microeconomic analysis at that stage.