Cambridge Journal of Economics 2016, 40, 469489

doi:10.1093/cje/beu087
Advance Access publication 21 February 2015

HiroakiSasaki*
This study investigates how profit sharing influences the economy by using a
Kaleckian model. Unlike existing research, I endogenise the profit share. The
analysis shows that profit sharing decreases or increases the equilibrium capacity
utilisation rate depending on whether the productivity-enhancing effect of profit
sharing is weak or strong. Moreover, the presented numerical simulations show that
the profit-sharing effects on income distributions differ according to the relative
strength of the productivity-enhancing effect of profit sharing.
Key words: Profit sharing, Income distribution, Regular and non-regular employment, Wage gap, Cyclical fluctuations
JEL Classifications: E12, E25, J53

1.Introduction
Profit sharing is a firm-driven policy that redistributes a proportion of company profits
to workers. According to the OECD Employment Outlook (1995), firms in many developed countries adopt profit sharing, such as Australia, Belgium, Canada, Finland, France,
Germany, the Netherlands, the UK and the USA.1 These firms do so because it increases
profits by incentivising workers and thereby raising labour productivity. In addition, workers
agree to profit sharing because their total income increases if they receive profits. Despite
these mutual benefits, however, how profit sharing affects the economy remains unclear.
By using a Kaleckian model that focusses on the relationship between income distribution
and output/growth,2 the present article thus bridges this gap in this body of knowledge by
investigating how profit sharing influences the steady-state equilibrium and its stability.
Gordon (1982) and Freeman and Weitzman (1987) state that the Japanese economy enjoyed a much more stable growth than the Western economies until the 1980s
Manuscript received 9 October 2013; final version received 28 October 2014.
Address correspondence to: H.Sasaki,Yoshida-Honmachi, Sakyo-ku, Kyoto 6068501, Japan; email sasaki@
econ.kyoto-u.ac.jp
*Kyoto University. Ithank seminar participants at Nagoya University and University of Massachusetts,
Amherst, lecturers and students who attended the 3rd Summer School on Analytical Political Economy at
Hitotsubashi University and two anonymous referees for their helpful comments and suggestions. The usual
disclaimer applies.
For cross-country differences in the form and significance of profit sharing, see Blinder (1990).
For the framework of the Kaleckian model, see Rowthorn (1981) and Lavoie (1992).

1
2

The Author 2015. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.

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Profit sharing and its effect on income

distribution and output: a Kaleckian
approach

470H. Sasaki

3
Lima (2012) investigates an economy in which firms both with and without profit sharing co-exist and
assumes that labour productivity is higher for firms with profit sharing.

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because the Japanese bonus system, which is more elastic than salaries, contributes to
flexible wage adjustments and alleviates production adjustment problems. However,
Taylor (1988) and Ohashi (1989) deny that the bonus system has such a growthstabilising effect. Actually, the Japanese economy has experienced prolonged recession.
Japan has recently been encouraging wage increases on a large scale to achieve economic recovery. Many firms have responded by raising bonuses but not salaries. What
are the implications of this firm behaviour? Can an increase in bonuses drive economic
recovery?
Most existing theoretical studies of profit sharing consider the cost aspects and show
that the introduction of profit sharing lowers basic salaries and improves labour productivity. Weitzman (1985), for example, extends a monopolistic competition model to
show that profit sharing can increase employment as long as it lowers the basic salaries
of workers. Liu and Chang (2011) introduce a profit-sharing rule into an endogenous
growth model and find that a higher degree of monopoly is likely to increase the longrun growthrate.
However, scholars must also consider that the introduction of profit sharing increases
workers income, which contributes to raising output and employment through the
principle of effective demand. For this purpose, a Kaleckian model based on this principle is useful for investigating the growthdistribution relation. Nonetheless, to my
knowledge, Lima (2010, 2012) is the only author to have investigated profit sharing
using Kaleckian models.3 In particular, Lima (2010) investigates how profit sharing
affects macroeconomic variables based on a Kaleckian model in which the mark-up
rate of firms, and hence the profit share (the ratio of profit to national income), is constant. He considers some extended cases in which the specification of the investment
function is modified, both workers and capitalists save or labour productivity increases
with the introduction of profit sharing. For example, under the standard setting in
which workers do not save and investment demand is positively related to both the
profit rate and the capacity utilisation rate, profit sharing increases the equilibrium
capacity utilisation rate. In this sense, profit sharing has a stimulating effect on the
economy, depending on the model specification. Lima (2010) also shows that if workers do not save and investment demand is positively related to both the profit share
and the capacity utilisation rate la Marglin and Bhaduri (1990), profit sharing either
increases or decreases capacity utilisation depending on whether the profit share has a
large or small effect on investment.
Although Limas (2010) results are interesting, there is room for improvement
around the assumption that the mark-up rate of firms is fixed, as it is unreasonable to
presume that the profit share remains constant in a profit-sharing setting. With profit
sharing, firms anticipate a decrease in their profits that remain after sharing and are
therefore likely to add the decrement to the price of goods that they sell. Furthermore
labour unions anticipate an increase in income from profit sharing and may not conduct active wage bargaining. Thus, because profit sharing is likely to change the profit
share owing to these firm and labour union behaviours, Iendogenise the profit share
in thisstudy.
Moreover, income distribution is endogenously determined through wage bargaining. In addition, considering that only certain workers share firm profits, Iextend the

Profit sharing and its effect on income distribution andoutput 471

2.Model
Consider an economy with regular/non-regular workers and capitalists. For analytical
convenience, Iabstract the government and international trade. Workers supply labour
to firms and receive wages. Capitalists supply capital to firms and obtain profits. Let
LR and LNR denote the employment of regular and non-regular workers, respectively.
I assume that regular employment LR is related to potential output YC, whilst nonregular employment LNR is related to actual output Y:

LR = Y C ,

> 0(1)

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models of Rowthorn (1981) and Raghavendra (2006), which consider two types of
workers: variable labour and fixed labour. In their models, both types of workers obtain
the same wage and spend all their wage income on consumption, whilst capitalists save
a constant proportion of profits. In the model presented herein, however, Imake the
following three assumptions: (i) non-regular workers obtain only a wage income and
spend it entirely on consumption; (ii) regular workers obtain both a wage income and
profit from profit sharing and save a constant proportion of this total; and (iii) capitalists save a constant proportion of profits after profit sharing. Furthermore, based
on the empirical evidence (Weitzman and Kruse, 1990; Dube and Freeman, 2008),
Iassume that profit sharing increases the labour productivity of regular workers only,
since non-regular workers do not obtain profits from profit sharing.
Of previous studies that consider profit sharing by using macrodynamic models,
Mainwaring (1993) and Fanti and Manfredi (1998) are noteworthy. By extending
Pohjolas (1981) discrete-time version of the Goodwin (1967) model, Mainwaring
(1993) shows that income transfers from capitalists to workers equivalent to the profit
share decrease the equilibrium employment rate and increase the equilibrium profit
share. Fanti and Manfredi (1998) build a continuous-time version of the Goodwin
model and show that profit sharing stabilises the economy; specifically, it leaves the
equilibrium profit share unchanged but decreases the equilibrium employment rate.
Therefore, their result concerning the employment rate is similar to that of Mainwaring
(1993).
Whilst these findings confirm that profit sharing does not stimulate the economy,
they do not conclusively show whether it has a stabilising effect. My findings thus add
to the research stream in this regard by showing that (i) under a strong productivityenhancing effect, profit sharing increases the equilibrium capacity utilisation rate, and
(ii) the profit-sharing effect on income distribution differs according to the prevailing
conditions.
The contributions of this study are twofold. First, Iendogenise the profit share and
obtain results that differ from those of fixed profit share analyses. The specification is
more realistic because Ispecify firm and labour union behaviours based on profit sharing. Second, I determine under what circumstances each agent benefits from profit
sharing by investigating income distribution amongst regular/non-regular workers and
capitalists using numerical simulations.
The remainder of the article is organised as follows. Section 2 presents the model.
Section 3 examines the local stability of the steady-state equilibrium. Section 4 presents a comparative static analysis and the numerical simulations and compares the
results with those of previous studies. Section 5 concludes.

472H. Sasaki
LNR = Y ,

> 0(2)

where and are labour input coefficients. From equations (1) and (2), the ratio of
non-regular to regular employment is given by LNR / LR = u / .
Here, following previous empirical studies, I assume that labour productivity
increases and the labour input coefficient of regular workers decreases with the introduction of profit sharing. Thus, Ican write as follows:

0 (3)

where = d / d and denotes a sharing parameterthe ratio of profits received by

regular workers to all profits (0< <1). Hereafter, Idenote the derivative or partial derivative of a function with respect to a variable as a subscript. Since Iassume that only regular
workers receive profit-sharing benefits, labour productivity increases for this grouponly.
By denoting total employment as L=LR + LNR and using equations (1) and (2),
Iobtain average labour productivity a=Y/L as follows:

a=

Y
Y
u
=
=
a( u ; ),
C
LR + LNR ( )Y + Y ( ) + u

au > 0,

a > 0


(4)

That is, average labour productivity increases with the capacity utilisation rate u = Y / Y C
and sharing parameter . In other words, the economy first shows increasing returns to scale
in that average labour productivity rises with an increase in output. This mechanism is similar to Okuns law (Okun, 1981; Raghavendra, 2006). Profit sharing then increases average
labour productivity by raising the labour productivity of regular workers. By differentiating
equation (4) with respect to time, Iobtain the rate of change in average labour productivity:
a
u
( )
=

a ( ) + u u 

(5)

Since u is constant at the steady-state equilibrium (u = 0), as explained later, the corresponding average labour productivity is also constant. Thus, perpetual technical progress does not exist in themodel.
The nominal wage for regular employment, wR, is supposed to be higher than that
for non-regular employment, wNR, at a constant rate, :4
wR = wNR ,

> 1

(6)

Then, the average wage of the economy is givenby

( )
u
w =
w +
w
L
L NR ( ) + u R ( ) + u NR
( ) + u
( ) + u
<1
=
wR = ( u )wR , 0 < ( u )
[ ( ) + u ]
[ ( ) + u ]

w=

LR

wR +

LNR

(7)


4
The same assumption is adopted in Sasaki etal. (2013), who develop a Kaleckian model comprising regular and non-regular workers and analyse how the expansion of the wage gap between them affects the economy.

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= ( ),

Profit sharing and its effect on income distribution andoutput 473

where ( u ) = w / wR denotes the ratio of average wage to regular workers wage. Average
wage is given by the weighted average of regular and non-regular workers wages based
on the corresponding employmentshare.
The distribution of national income leadsto

pY = wL

rpK
1
rpK
+
 + (

)
=
workers

capitalists

wNR LNR




non regular workers

+ wR LR + rpK + (
1
rpK

)



regular workers

capitalists

(8)

w L + rpK
(1 )rpK
g s = sw R R
+ sc
= s( )um + sw ( u )(1 m ),

pK
pK

( )u
s( ) (1 )sc + sw , ( u ; )
,
( ) + u
s = ( sc sw ) 0, u > 0, < 0

(9)


Following Marglin and Bhaduri (1990), I assume that firms investment demand
function gd is an increasing function of the capacity utilisation rate u and capitalists
income share . In Marglin and Bhaduri (1990), the profit share m is an explanatory
variable of the investment function. However, in a profit-sharing setting, it is reasonable to use the amount of profits after sharing (i.e., capitalists income share) as an
explanatory variable of the investment function:6

g d = g d ( u , ) = g d ( u ,(1 )m ),

g ud > 0,

g d > 0

(10)

I call equation (10) the MB investment function. Here, g ud and g d denote the partial
derivative of the investment function with respect to capacity utilisation and capitalists
d
d
income share, respectively. Note that g m = (1 )g .
I assume that the capacity utilisation rate increases (decreases) in accordance with
excess demand (supply) in the goods market:
5
If workers save, they indirectly own capital stock (Pasinetti, 1962). However, for simplicity, Idisregard
this fact.
6
A similar specification is adopted in Lima (2010).

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where p denotes the price of goods, r the profit rate, and K capital stock. Let m denote
the profit share, that is, m=rpK/(pY). Then, the wage share is given by 1 m=wL/
(pY). In addition, assuming profit sharing, Idefine as the ratio of capitalists income
to national income and 1 as the ratio of the sum of regular and non-regular workers income to national income. Then, Ihave =(1 )m. Hereafter, Irefer to as
capitalists incomeshare.
Assuming that the ratio of capital stock to potential output YC is equal to unity, that
is, K/YC=1, Iindicate the capacity utilisation rate as u=Y/K. Therefore, r=um.
Since regular workers earn a higher income than do non-regular workers, they can
afford to save; hence, they have a higher propensity to save than do non-regular workers.
Suppose that non-regular workers spend all their wage income, wNRLNR, on consumption,
regular workers save a constant proportion, sw, of the sum of wage income and profit
share, that is, wRLR+rpK, and capitalists save a constant proportion, sc, of the profit
after sharing, that is, (1 )rpK. Suppose also that 0 sw sc < 1, that is, the saving rate of
capitalists is higher than that of regular workers.5 Then, the saving function gs is givenby

474H. Sasaki
u = ( g d g s ),

> 0(11)

m
p w a
= +
1 m p w a 

(12)

That is, the rate of change in the profit share is decomposed into the rates of change
in price, average wage in the whole economy and average labour productivity. Here,
Iformalise the equations of the price of goods and regular employment wage by using
Rowthorns (1977) theory of conflicting claims inflation.7
First, firms set their price to narrow the gap between their target income share f
and actual income share , and the price changes accordingly. Second, labour unions
negotiate to narrow the gap between their target income share w and actual income
share , and the nominal regular employment wage changes accordingly. Note that
only regular workers engage in wage bargaining. Kalecki (1971) also considers money
wage bargaining.8 These two assumptions can be written as follows:
p
= f ( f ) = f [ f (1 )m ],
p

w R
wR

0 < f < 1,

f > 0


= w ( w ) = w [(1 )m w ],

w = w ( u ),

wu < 0, 0 < w < 1, w > 0

(13)

(14)


where f and w denote the speed of price adjustment and regular workers wage,
respectively. The target income share of labour unions decreases but the rate of change
in nominal/real wage increases with the rate of capacity utilisation. This effect corresponds to the Marxian reserve army effect. As the rate of capacity utilisation (a proxy
for the rate of employment) increases, the bargaining power of labour unions grows
and they demand a higher wage share (i.e., a lower profit share). Other things being
equal, this leads to an increase in the rate of change in the nominal wage. In addition,
by partially differentiating equations (13) and (14) with respect to the sharing parameter, Ifind that profit sharing increases the rate of change in prices and decreases the
rate of change in wages. These results are consistent with that stated in Section 1: with
For a Kaleckian model with conflicting claims inflation, see Cassetti (2003).
Kalecki (1971) explains wage bargaining as follows. When the mark-up rate of a firm is high, labour
unions think that the firm can afford to pay, and therefore negotiate for, higher wages. Higher wages lead to
an increase in the average cost of the firm, which in turn weakens its price competitiveness. Accordingly, the
firm lowers the mark-up rate, leading to income redistribution from profits to wages.
7
8

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where denotes the speed of adjustment by the goods market.

Unlike Lima (2010), I assume that the profit share is endogenously determined
through labourmanagement negotiations. Because traditional Kaleckian models
assume a constant mark-up rate, the profit share is also constant. However, owing
to the behaviours of firms and labour unions described in Section 1, profit sharing is
likely to change the profitshare.
Taking the derivative of the definition of the profit share m = 1 [w/(pa)] with
respect to time leadsto

Profit sharing and its effect on income distribution andoutput 475

u = [ g d ( u ,(1 )m ) s( )um sw ( u ; )(1 m )](15)

m = (1 m )[(1 )( f + w )m f f w w ( u ) f ( u ; )u ],
( )
, fu < 0, f < 0
where f ( u ; ) =
[ ( ) + u ]u


(16)

The steady-state equilibrium is such that u = m = 0. From this, the equilibrium values of u and m satisfy the following equations:9
g d ( u ,(1 )m ) = s( )um + sw ( u ; )(1 m )(17)

(1 )( f + w )m = f f + w w ( u )

(18)

In the following analysis, I assume a unique pair of u (0,1) and m (0,1) that
simultaneously satisfy equations (17) and (18), where the asterisk denotes the
equilibriumvalue.
From equations (17) and (18), I find that the steady-state equilibrium does not
depend on the parameter , which represents the speed of adjustment by the goods
market. This property is used in the stability analysis in Section3.
Finally, I summarise the notion of income distribution. Non-regular and regular
workers income shares are respectively givenby
wNR LNR
pY

= [1 ( u ; )](1 m )


wR LR + rpK
pY

= ( u ; )(1 m ) + m


The real wages of non-regular and regular workers are respectively givenby
Of course, m=1 is a steady-state equilibrium. However, Ifocus on interior solutions.

(19)

(20)

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profit sharing, firms anticipate a decrease in their profits that remain after sharing and
are therefore likely to add the decrement to the price of goods that they sell, whereas
labour unions anticipate an increase in income from profit sharing and may not conduct active wage bargaining.
Note that in conflicting claims inflation theory, the profit share m rather than
capitalists income share is used. However, if Iassume profit sharing, Ishould use
capitalists income share as described by equations (13) and (14). Some might think
that equation (14) is problematic; since regular workers engage in wage bargaining,
their target must be (wR LR + rpK ) / ( pY ) rather than (wL + rpK ) / ( pY ). However,
Iassume that equation (14) determines the wage of the leading sectors labour unions,
which influence the wage determination for the whole economy, and that the leading
sectors consider workers income share (i.e., capitalists income share ).
By substituting equations (9) and (10) into equation (11), and equations (5), (13)
and (14) into equation (12), Iobtain the following dynamic equations with respect to
the capacity utilisation rate and profitshare:

476H. Sasaki
wNR
p

wR
p

u
(1 m )
( ) + u


(21)

u
(1 m )
( ) + u


(22)

When u and m are determined, these distributive variables are also determined.

To investigate the stability of the steady-state equilibrium, Ianalyse the Jacobian matrix
J of the system of the differential equations (15) and(16):
J
J = 11
J 21

J12
J 22

(23)


where the elements of J are givenby

u
= [ g ud s( )m sw (1 m ) u ]
u


(24)

u
= [(1 )g d s( )u + sw ( u ; )]
m


(25)

m
= (1 m )[w wu + f ( u ; ) J11 ]
u


(26)

m
= (1 m )[(1 )( f + w ) f ( u ; ) J12 ]
m


(27)

J11 =

J12 =

J 21 =

J 22 =

All the elements of J are evaluated at the steady-state equilibrium, although asterisks
are not added for simplicity. In what follows, Iexplain equations (24)(27).
J11 shows the effect of an increase in the capacity utilisation rate on a change in
the capacity utilisation rate (i.e., the quantity adjustments in the goods market). An
increase in the capacity utilisation rate increases not only investment demand but also
the savings of both capitalists and regular workers. For a stable quantity adjustment,
the following condition is needed.
d
Assumption 1. The condition g u < s( )m + sw (1 m ) u holds.

This means that the response of savings to the capacity utilisation rate is larger than that of
investments. Assumption 1 is sometimes called the Keynesian stability condition (Marglin
and Bhaduri, 1990), which is often imposed in Kaleckian models.10 With Assumption 1,
Iobtain J11 < 0 from equation (24). Kaleckis model with exogenous investment in the
short run has the same stability condition. Unlike the situation in which only the capacity
However, Skott (2010, 2012) criticises the Keynesian stability condition.

10

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3. Stability analysis

Profit sharing and its effect on income distribution andoutput 477

Definition 1. If the relation (1 )g d > s( )u sw ( u ; ) holds, the steady-state equilibrium is called

a profit-led demand regime. If, by contrast, the relation (1 )g d < s( )u sw ( u ; ) holds, the steadystate equilibrium is called a wage-led demand regime.

If the investment response to the profit share is less (more) than the saving response,
the steady-state equilibrium exhibits a wage-led (profit-led) demand regime. From
equation (25), Ihave J12 > 0 in a profit-led demand regime and J12 < 0 in a wage-led
demand regime. Since a rise in the profit share increases the consumption of regular
workers, a profit-led demand regime is likely to emerge in the model in contrast to the
usual Kaleckian model, in which only capitalistssave.
J21 shows the effect of an increase in the capacity utilisation rate on a change in the
profit share. From equation (12), a change in the profit share is decomposed into the rates
of change in price, average wage and average labour productivity. Note that from equation (13), a capacity utilisation change does not affect the rate of change in price. From
equation (7), the rate of change in average wage is decomposed into the rates of change
in regular workers wages and in (u). From equation (14), the rate of change in regular
workers wages is then related to the capacity utilisation rate through the reserve army
effect. Likewise, from equation (7), the rate of change in (u) is related to the capacity
utilisation rate. Summarising these observations, Iobtain the following equation:

m
w R ( u ) a

=
u 1 m
u wR ( u ) a 

(28)

An increase in the capacity utilisation rate raises the rate of change in regular workers
wages, increases the rate of change in (u), and decreases the rate of change in average
labour productivity. Hence, summing up these effects, Ifind that the rate of change in
the profit share is negative when capacity utilisation increases, which leads to J21 <0.
J22 shows the effect of a profit share increase on the profit share itself. Examining
how the rate of change of the profit share changes when the profit share increases,
Iobtain the following equation:

m
p w R a

=
m 1 m m p wR a 

(29)

11
By contrast, as Bhaduri (2008) shows that even if the Keynesian stability condition does not hold, the
steady-state equilibrium can be stable if the stabilising effect of the profit share is strong. However, Iassume
that the Keynesian stability condition holds.

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utilisation rate changes, a Keynesian stability condition alone does not ensure the stability
of the whole dynamical system when the profit share also changes.11
J12 shows the effect of an increase in the profit share on a change in the capacity
utilisation rate. An increase in the profit share affects both investment and saving. An
increase in the profit share increases firms investment demand. Since regular workers save a constant proportion of the sum of wages and profits obtained from profit
sharing, such a rise also increases the proportion of savings from profits but decreases
that from wages, which in turn increases the proportion of consumption from wages.
The increase in saving lowers capacity utilisation, whereas the increase in consumption
raises the capacity utilisation rate. Let us classify the regime according to how a profit
share increase affects capacity utilisation.

478H. Sasaki

Proposition 1. Suppose that the steady-state equilibrium exhibits a wage-led demand regime. If the
reserve army effect is small (large), the steady-state equilibrium is locally stable (unstable).

Proof. See Appendix A.

Proposition 2. If the steady-state equilibrium exhibits a profit-led demand regime, it can be locally unstable.

Proof. See AppendixA.

Moreover, the steady-state equilibrium values do not depend on . Therefore, if
Ichoose as a bifurcation parameter, Ican prove the existence of limit cycles by using
the Hopf bifurcation theorem.
Proposition 3. Suppose that the steady state exhibits a profit-led demand regime. Then a limit cycle
occurs when the speed of adjustment by the goods market lies within some range.

Proof. See AppendixB.

Proposition 3 implies that as the adjustment speed of the goods market increases,
there appears a point at which the stable steady-state equilibrium becomes unstable.
4. Comparative static and numerical analysis
4.1 Comparative static analysis
For the comparative static analysis, Ineed the stability of the steady-state equilibrium.
Thus, Iassume detJ > 0 in the following analysis. By totally differentiating equations
(17) and (18) and investigating the resultant expressions, Iobtain the following two
propositions.
Proposition 4. If the productivity-enhancing effect of profit sharing is weak (strong), an increase in
the sharing parameter decreases (increases) the equilibrium rate of capacity utilisation.

Proof. See Appendix C.

Proposition 5. If the productivity-enhancing effect of profit sharing is weak (strong), the effect of an
increase in the sharing parameter on the equilibrium profit share is positive (ambiguous).

Proof. See AppendixD.

Moreover, by investigating special cases, Iobtain the following two propositions.
Proposition 6. When the productivity-enhancing effect of profit sharing is zero, profit sharing decreases
the rate of capacity utilisation and increases the profit share.

Proof. See Appendices C and D.

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An increase in the profit share has the following effects: (i) the rate of change in price
increases (equation (13)); (ii) the rate of change in regular workers wages increases (equation (14)); and (iii) the rate of change in average labour productivity either increases or
decreases (equation (5)). If the economy is under a wage-led demand regime, the third effect
would be negative, meaning J22 < 0.By contrast, if the economy follows a profit-led demand
regime, in which the third effect is positive and strong, Iobtain J22 > 0.Nevertheless, note
that the sign of J22 does not affect the local stability of the steady-state equilibrium.
The necessary and sufficient condition for the local stability of the steady-state equilibrium is that all the characteristic roots of the Jacobian matrix J have negative real
parts. By examining this condition in the model, Iobtain the following two propositions, depending on which regime is realised.

Profit sharing and its effect on income distribution andoutput 479

Proposition 7. If regular workers do not save, profit sharing does not affect the rate of capacity utilisation, but it increases the profit share.

Proof. See Appendices C andD.

4.2 Numerical examples

In this subsection, Iconsider four steady-state equilibrium cases: a profit-led demand
regime where the productivity-enhancing effect is weak or strong (cases 1 and 2,
respectively) and a wage-led demand regime where the productivity-enhancing effect
is weak or strong (cases 3 and 4, respectively). For the numerical examples, Ispecify
the investment function, labour input coefficient of regular workers and target income
share of labour unions as follows:12

g d = g 0 u = g 0 u [(1 )m ] ,

g 0 > 0,

0 > 0,

0 < < 1,

> 0

(30)

= 0 1,

1 > 0(31)

w = 0 1u , 0 > 0, 1 > 0(32)

where g0 denotes the shift parameter of the investment function, the elasticity of
investment with respect to the rate of capacity utilisation, the elasticity of investment
with respect to the profit share, 0 a positive constant, 1 a positive parameter that
indicates the relative strength of the productivity-enhancing effect of profit sharing,
0 a positive constant and 1 a positive parameter that indicates the size of the reserve
army effect. In addition, Iuse numerical simulations to investigate the effects of profit
sharing on the income shares of capitalists, non-regular workers and regular workers; real wages of non-regular and regular workers; profit rate; and the rate of capital
accumulation.

12
Cobb-Douglas investment functions such as this are also adopted by Blecker (2002) and Sasaki etal.
(2013).

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As Proposition 4 shows, the relative strength of the productivity-enhancing effect of

profit sharing is important for determining how profit sharing influences the equilibrium capacity utilisation rate. First, when the sharing parameter and, in turn, labour
productivity increase, the wages of both regular and non-regular workers increase.
Consumption demand thus rises, increasing effective demand and thereby the capacity utilisation rate. This is a positive effect. Second, when the sharing parameter and,
hence, labour productivity increase, capitalists income decreases. This decreases consumption demand and thereby effective demand, leading to a fall in the capacity utilisation rate. This is a negative effect. Third, when the sharing parameter increases,
investment demand and, hence, effective demand decrease, reducing the capacity utilisation rate. This is also a negative effect. When the productivity-enhancing effect is
strong, the positive effect dominates the two negative effects, meaning that the capacity
utilisation rate increases. By contrast, when the productivity-enhancing effect is weak,
the two negative effects dominate the positive effect, meaning that the capacity utilisation rate decreases.

480H. Sasaki
4.2.1 Case 1: profit-led demand with a weak productivity-enhancing effect
I set the parameters and initial values of u and m as follows. Then, Iincrease the sharing parameter from = 0.1 to =0.12.

g 0 = 1.3, = 0.2, = 2, sc = 0.6, sw = 0.1, = 2, f = 0.4, w = 0.6, f = 0.7,

0 = 0.1, 1 = 0.1, = 2, 0 = 1.8, 1 = 0.1, = 1, u(0) = 0.4, m(0) = 0.3

4.2.2 Case 2: profit-led demand with a strong productivity-enhancing effect

In this case, Iuse 1=2 instead of 1=0.1 and leave the other parameters unchanged.
Then, Iincrease the sharing parameter from =0.1 to =0.12. Table2 summarises
the results. The increase in the sharing parameter raises the rate of capacity utilisation
and the profit share, and hence the equilibrium is apparently characterised as a profitled demand regime.
Unlike in case 1, capitalists income share decreases and both regular and non-regular workers real wages increase. Moreover, both the profit rate and the rate of capital
accumulation increase. Though the figures are not presented, as in case 1, the degree
of fluctuation diminishes with an increase in the sharing parameter. Therefore, profit
sharing stabilises business cycles.

Table1. Case 1: Profit-led demand with a weak productivity-enhancing effect

Capacity utilisation rate

Profit share
Capitalists income share
Non-regular workers income share
Regular workers income share
Non-regular workers real wage
Regular workers real wage
Profit rate
Capital accumulation rate
Labour productivity
Non-regular to regular employment ratio

=0.1

=0.12

+ or

0.433848
0.348855
0.313969
0.399182
0.286849
0.070381
0.140762
0.15135
0.108439
0.195089
0.242373

0.433694
0.356794
0.313978
0.394424
0.291598
0.06957
0.13914
0.154739
0.108437
0.195209
0.242558

+
+

+
+

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Table 1 summarises the results. As shown analytically in Section 4.1, an increase

in the sharing parameter decreases the rate of capacity utilisation and increases
the profit share. In this case, the steady-state equilibrium is defined as a profit-led
demand regime. However, the profit share increases and the capacity utilisation
rate decreases. Therefore, the equilibrium is apparently characterised as a wage-led
demand regime.
Furthermore, the income shares of both capitalists and regular workers increase,
whilst that of non-regular workers decreases. In addition, both regular and non-regular
workers real wages decrease. Moreover, the profit rate increases, whereas the rate of
capital accumulation decreases.

Profit sharing and its effect on income distribution andoutput 481

4.2.3 Case 3: wage-led demand with a weak productivity-enhancing effect
I set the parameters and initial values of u and m as follows. Then, Iincrease the sharing parameter from =0.1 to =0.12.

g 0 = 0.3, = 0.4, = 0.2, sc = 0.7, sw = 0.1, = 2, f = 0.3, w = 0.7, f = 0.3,

0 = 0.4, 1 = 0.1, = 1.5, 0 = 1, 1 = 0.05, = 1, u(0) = 0.4, m(0) = 0.3

4.2.4 Case 4: wage-led demand with a strong productivity-enhancing effect

I set the parameters and initial values of u and m as follows. Iuse 1=2 instead of
1=0.05. Then, Iincrease the sharing parameter from =0.1 to =0.12. Table4 summarises the results. The increase in the sharing parameter raises both the profit share
Table2. Case 2: Profit-led demand with a strong productivity-enhancing effect

Capacity utilisation rate

Profit share
Capitalists income share
Non-regular workers income share
Regular workers income share
Non-regular workers real wage
Regular workers real wage
Profit rate
Capital accumulation rate
Labour productivity
Non-regular to regular employment ratio

=0.1

=0.12

+ or

0.435296
0.348758
0.313882
0.401703
0.284414
0.077981
0.155962
0.151813
0.108451
0.213874
0.272060

0.435451
0.356674
0.313873
0.397499
0.288628
0.078791
0.157582
0.155314
0.108452
0.218222
0.279135

+
+

+
+
+
+
+
+
+

Table3. Case 3:Wage-led demand with a weak productivity-enhancing effect

Capacity utilisation rate

Profit share
Capitalists income share
Non-regular workers income share
Regular workers income share
Non-regular workers real wage
Regular workers real wage
Profit rate
Capital accumulation rate
Labour productivity
Non-regular to regular employment ratio

=0.1

=0.12

+ or

0.844181
0.345453
0.310907
0.301615
0.387478
0.236471
0.354706
0.291624
0.221933
0.458998
0.848423

0.842212
0.35346
0.311045
0.298571
0.390384
0.233379
0.350069
0.297689
0.221745
0.458668
0.847296

+
+

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Table3 summarises the results. The increase in the sharing parameter decreases the
rate of capacity utilisation but raises the profit share. The steady-state equilibrium is
defined as a wage-led demand regime. In this case, the profit share increases and the
rate of capacity utilisation decreases. Hence, the numerical result is consistent with the
definition.

482H. Sasaki
and the capacity utilisation rate. In this case, the steady-state equilibrium is defined as a
wage-led demand regime but is apparently characterised as a profit-led demand regime.
4.3 Summary of the numerical examples
The results of the numerical examples are summarised as follows:

Because the actual strength of the productivity-enhancing effect is unknown, these

four cases are all difficult to distinguish in reality. Empirical studies tend to show that
many countries have a wage-led demand regime (Storm and Naastepad, 2012; Onaran
and Galanis, 2013; Hartwig, 2014). However, as von Arnim etal. (2014) point out,
empirical disputes on whether effective demand is profit-led or wage-led are far from
Table4. Case 4:Wage-led demand with a strong productivity-enhancing effect

Capacity utilisation rate

Profit share
Capitalists income share
Non-regular workers income share
Regular workers income share
Non-regular workers real wage
Regular workers real wage
Profit rate
Capital accumulation rate
Labour productivity
Non-regular to regular employment ratio

=0.1

=0.12

+ or

0.87017
0.343431
0.309088
0.325392
0.3655
0.27598
0.413971
0.298844
0.224378
0.521007
1.08771

0.874054
0.350928
0.308816
0.327954
0.36323
0.281683
0.422524
0.30673
0.224738
0.534899
1.15007

+
+

+
+
+
+
+
+

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(1) In every case, profit sharing increases the profit share. In contrast to the effect discussed in Section 4.1, Ifind that a rise in the sharing parameter increases the profit
share.
(2) When the productivity-enhancing effect is weak (strong), profit sharing increases
(decreases) capitalists income share.
(3) When the equilibrium exhibits a wage-led demand regime and the productivityenhancing effect is strong, profit sharing increases non-regular workers income
share. In other words, the possibility that profit sharing increases non-regular workers income share is low.
(4) In three cases, profit sharing increases regular workers income share. In other words,
the possibility that profit sharing increases regular workers income share is high.
(5) When the productivity-enhancing effect is weak (strong), the real wages of both
regular and non-regular workers decrease (increase).
(6) In every case, profit sharing increases the profit rate. Nonetheless, profit sharing
does not always increase the rate of capital accumulation. When the productivity-enhancing effect is weak (strong), the rate of capital accumulation decreases
(increases). These results do not vary according to the equilibrium regime.
(7) Except for case 3, profit sharing increases the ratio of non-regular to regular employment. In case 3, profit sharing decreases the employment ratio because the decline
in the capacity utilisation rate exceeds that in economy-wide productivity. As stated
in point (3), profit sharing has a low possibility of increasing non-regular workers
income share but a high possibility of improving their employment.

Profit sharing and its effect on income distribution andoutput 483

4.4 Transitional dynamics of each groups incomeshare

The foregoing analysis focusses only on the steady-state equilibrium. In this subsection, by
using numerical simulations, Iinvestigate the transitional dynamics of income distribution
between capitalists, regular workers and non-regular workers. In cases 1 and 2 (profit-led
demand regime), limit cycles occur depending on the conditions, and hence all endogenous variables fluctuate perpetually. In cases 3 and 4 (wage-led demand regime), the economy converges to the steady state. The transitional dynamics of each income share in every
case is given by Figures 14. The solid lines, dashed lines, and dotted lines correspond to
the income shares of capitalists, non-regular workers, and regular workers, respectively.
First, cases 1 and 2 show the largest fluctuation in non-regular workers income
share, followed by those of capitalists and regular workers in that order. In this sense,
non-regular workers are exposed to income fluctuations. Second, in all cases, Iobserve
the following patterns: (i) the income shares of non-regular and regular workers move
in the same or opposite directions; (ii) the income shares of regular workers and capitalists move in the same or opposite directions; and (iii) the income shares of capitalists and non-regular workers move in the same or opposite directions. Accordingly,
each group has a complementary and oppositional relationship to the other groups.
Therefore, no specific group suffers a loss consistently.
4.5 Comparisons with previous studies
Mainwaring (1993) presents a discrete-time version of the Goodwin model and investigates how income transfers from capitalists to workers affect the economy. Although
he does not use the phrase profit sharing in his paper, his analysis is similar to the
present investigation. According to Mainwaring, an increase in the sharing parameter
decreases the employment rate but increases the profitshare.
Fanti and Manfredi (1998) build a continuous-time version of the Goodwin model
and investigate the effect of profit sharing on the equilibrium value and the dynamical
stability. In the usual Goodwin model, the rate of change in real wages is assumed to
be positively related to the employment rate. However, Fanti and Manfredis (1998)
profit-sharing model is based on the assumption that the rate of change in real wages
is positively related to the employment rate and the profit rate.13 These authors refer to
the coefficient of the profit rate as the sharing parameter. Their model yields dynamical
13
A wage equation such as this is also used in Lordon (1997), where endogenous technical change due
to the KaldorVerdoorn law is considered.

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settled. The results depend on the countries, time periods and demand specifications
as well as the distributive variables. Hence, at this stage, Icannot find a clear correspondence between specific countries and their demand regimes.
As already stated, the effect of profit sharing on the rates of capacity utilisation and capital accumulation is unrelated to demand regimes. By contrast, the effect of profit sharing
on the income shares of each group (i.e., regular/non-regular workers, capitalists) is related
to the demand regime. When the productivity-enhancing effect is strong, an increase in the
sharing parameter decreases capitalists income share irrespective of the demand regime,
increases regular workers income share, and decreases non-regular workers income
share if the demand regime is profit-led. By contrast, it decreases regular workers income
share and increases non-regular workers income share if the demand regime is wage-led.
Accordingly, whether an actual economy under a profit sharing rule exhibits a profit-led
or wage-led demand regime concerns income distribution, and not output and growth.

484H. Sasaki

Figure2. Transitional dynamics in case 2

Figure3. Transitional dynamics in case 3

equations of the employment rate and wage share and shows that the steady state is
always locally stable. In other words, profit sharing stabilises the dynamical system.
Moreover, in their model, profit sharing decreases the equilibrium employment rate
but does not affect the equilibrium profitshare.
In any comparison between Fanti and Manfredis (1998) and the present results,
I must consider the savings assumption with caution. They assume that all profits
are saved, which in the context of the present model would mean that capitalists and
regular workers save all their profits after sharing; that is, sc=sw=1. Because of this

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Figure1. Transitional dynamics in case 1

Profit sharing and its effect on income distribution andoutput 485

Table5. Results of the case of a fixed profit share

Case of a fixed profit share

u*

g*

Kaleckian investment function and sw=0

Kaleckian investment function and sw > 0
Robinsonian investment function and sw=0
Robinsonian investment function and sw > 0
MB investment function and sw=0
MB investment function, sw=0, and <0

+
+
+
+/
+
+/

+
+
0

+/
+/

Source: Lima (2010)

savings assumption, profit sharing does not affect the equilibrium profit share in Fanti
and Manfredis (1998) model. However, by assuming that 0< sw < sc < 1, as in the
model, and recalculating the resultant model, Ifind that profit sharing increases the
equilibrium profit share but decreases the equilibrium employment rate. In addition,
even under the assumption that 0< sw < sc < 1, the stability analysis does not change:
the introduction of profit sharing always stabilises the dynamics of theirmodel.
Limas (2010) results are summarised in Table5, which shows that when the MB
investment function is used with the assumption sw=0, a rise in the sharing parameter increases the equilibrium value of the capacity utilisation rate. By contrast, in the
model, when the MB investment function is used under the assumption sw=0, a rise
in the sharing parameter does not affect the equilibrium capacity utilisation rate. This
difference depends on whether the profit share is fixed or endogenised. Moreover,
how the productivity-enhancing effect of profit sharing in Lima (2010) influences the
equilibrium rate of capacity utilisation is ambiguous if workers do not save and the
MB investment function is used. By contrast, even though Iconsider the productivityenhancing effect and use the MB investment function, profit sharing never affects the
equilibrium capacity utilisation rate as long as workers do notsave.
5.Conclusion
In this study, I presented a modified Kaleckian model with profit sharing that
endogenised income distribution and then investigated the effect of profit sharing
on the economy. The comparative static analysis showed that profit sharing either

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Figure4. Transitional dynamics in case 4

486H. Sasaki

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increases or decreases the equilibrium capacity utilisation rate depending on whether

the productivity-enhancing effect of profit sharing is strong or weak. These results differ from the finding of classical Kaleckian models with a fixed profit share that profit
sharing positively affects capacity utilisation in mostcases.
In addition, the numerical simulations presented herein showed that the effects of
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Second, suppose that a government levies a corporate tax on firms. If the government redistributes tax revenues amongst workers, then the results with regards to
profit sharing are likely to hold. That is, corporate taxes and profit sharing have similar
effects on the economy.
It is implicit that these results depend on the model specificationswhether workers
save, the explanatory variable of the investment function and whether the productivityenhancing effect of profit sharing works. Future studies could thus aim to determine
empirically those specifications most relevant to real-world problems.

Profit sharing and its effect on income distribution andoutput 487

Appendix A: proof of Propositions 1 and2

From Assumption 1 and Definition 1, the sign structure of the Jacobian matrix J is

J=
? 

(A.1)

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488H. Sasaki
The steady-state equilibrium is locally stable if and only if all the roots of the characteristic equation corresponding to J have negative real parts. This condition is equivalent
to the condition that the determinant detJ of the Jacobian matrix J is positive and the
trace trJ is negative. Let us confirm whether these conditions are satisfied in the model:

tr J = J11 (1 )( f + w )(1 m ) + (1 m ) f ( u ; ) J12 ,

+/

(A.2)

det J = (1 m )[(1 )( f + w ) J11 + w wu J12 ].

(A.3)

First, Iexamine the sign of trJ. When the equilibrium exhibits a profit-led demand
regime, that is, J12 > 0, Iobtain trJ > 0 for a large f(u;) > 0.When the equilibrium
exhibits a wage-led demand regime, that is, J12 < 0, Iobtain trJ <0.
Next, Iexamine the sign of detJ. When the equilibrium exhibits a profit-led demand
regime, that is, J12 > 0, Iobtain detJ > 0.When the equilibrium exhibits a wage-led
demand regime, that is, J12 < 0, Iobtain detJ < 0 with a large reserve-army effect, that
is, the absolute value of wu < 0 is large.

+/

Appendix B: proof of Proposition3

Choose as a bifurcation parameter. By defining
d
d

= [ g u s( )m sw (1 m ) u ] + (1 m ) f ( u; )[(1 )g s( )u + sw ( u ; )](B.1)

I can rewrite the trace of J as

tr J = (1 )( f + w )(1 m )



(B.2)

Suppose that > 0.Indeed, Ican obtain > 0 if the steady-state equilibrium exhibits
a profit-led demand. In addition, is independent of . Moreover, the equilibrium
values of the rate of capacity utilisation and profit share are independent of . Define
that 0 (1 )( f + w )(1 m ) / > 0 . Then, for = 0 , Iobtain tr J = 0; for < 0,
Iobtain tr J < 0 ; and for > 0, Iobtain trJ > 0.Therefore, = 0 is a Hopf bifurcation
point. That is, there exists a continuous family of non-stationary, periodic solutions of
the system around = 0 .
Appendix C: proof of Proposition4
By totally differentiating equations (17) and (18) and rearranging the resultant expressions, Iobtain

(1 )(1 m )
u2
+
m

+ u
+ u
du

=
d (1 )( f + w )[ g ud sm sw u (1 m )] + w wu [(1 )g d su + sw ]


sw ( f + w )

(C.1)

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Profit sharing and its effect on income distribution andoutput 489

The sign of the denominator on the right-hand side is opposite to the sign of detJ.
Thus, its sign is negative. Therefore, if the productivity-enhancing effect of profit sharing, that is, the absolute value of < 0, is large, the sign of the numerator on the
right-hand side is negative, and consequently Iobtain du / d > 0. By contrast, if the
productivity-enhancing effect of profit sharing, that is, the absolute value of < 0,
is small, the sign of the numerator on the right-hand side is positive; consequently,
Iobtain du / d < 0.
Then, Iconsider two special cases: = 0 and sw=0. Iobtain du / d < 0 in the first
case and du / d = 0 in the second.

Define du / d = . Then, Iobtain

dm ( f + w )m + w wu
=
d
(1 )( f + w )

(D.1)


When du / d = < 0, that is, the productivity-enhancing effect of profit sharing is

weak, Iobtain dm / d > 0, which implies that profit sharing increases the profit share.
By contrast, when du / d = > 0, that is, the productivity-enhancing effect of profit
sharing is strong, the sign of equation (D.1) is ambiguous.
Then, I consider two special cases: = 0 and sw = 0. In the first case, I obtain
du / d = < 0 and therefore dm / d > 0. In the second, I obtain du / d = = 0
and therefore dm / d > 0.

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Appendix D: proof of Proposition5