Abstract
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.
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