Agustina Colonna, University of Zurich (Job Market Seminar)

"Profit-Sharing, Wages, and Worker Compensation: Evidence from Mexico"

Abstract

Policies that encourage or mandate profit-sharing between firms and workers are widespread. Yet their effect on total worker compensation remains unclear when firms can offset profit-sharing benefits by adjusting wages. This paper studies firms’ incentives to adopt profit-sharing and provides new evidence on how firms adjust wages and employment in response to mandatory profit-sharing in Mexico. Leveraging longitudinal establishment data and employer-employee data, we observe that many firms circumvented mandated profit-sharing through outsourcing schemes, despite having the option to offer lower real wages. We then show that a reform that enforced profit-sharing caused newly complying establishments to only partially offset the cost of profit-sharing through real wage reductions, resulting in a 2.8% increase in average total compensation (wages + profit-sharing), with no effect on employment. These findings are consistent with a model in which labor supply is less responsive to profit-sharing than to wages: on average, one additional peso in wages attracts as many workers as three pesos in profit-sharing. Risk aversion to profit-sharing explains only 17% of workers’ limited responsiveness to this benefit. Instead, it is largely explained by information frictions that prevent workers from fully incorporating profit-sharing into their labor supply decisions. Our results shed light on the mechanisms shaping the incidence of profit-sharing and, more generally, of policies mandating non-wage compensation.

Contact person: Nikolaj Arpe Harmon