Every so often an exciting new idea erupts in the arcane world of economic theory. Few of these ideas purport to tell us how to make our economy work better. But, when those rare events happen, we should all take notice. The publication of Martin Weitzman's "The Share Economy" is just such an event.
Weitzman, an economics professor at MIT, argues that the United States and other nations need not continue to tolerate the high unemployment that has plagued us for a decade or more. By fixing a flaw in the way we compensate labor, he contends, we can restore full employment without suffering from higher inflation.
While this is as rosy a scenario as was ever painted by a supply-sider, Weitzman's theory is as different from supply-side economics as thinking is from wishful thinking. For "The Share Economy" offers coherent reasons to think that Weitzman's ideas might actually work.
In a way, the title of the book does a disservice by conjuring up images of a utopian society of unselfish people. But Weitzman's vision is in no sense utopian. The people in the economy he imagines are driven not by altruism but by self- interest. And the "radical" change he recommends can be accomplished by the widespread adoption of profit sharing.
What Weitzman calls a "share economy" is any system that makes the average cost of labor (cost per worker) fall when more workers are hired. This does not happen under a conventional wage contract because every worker is paid the same fixed wage. But it does happen under several alternative methods of compensating labor, such as profit sharing.
Weitzman's basic insight is that labor is cheaper at the margin under a share system than under a wage system, even if it costs the same on average. For this reason, a share system gives employers incentives not to lay off workers and even to expand their work forces. An example will show why.
Suppose Wageco pays workers $400 per week to manufacture widgets. In its drive for profits, it hires workers as long as each additional worker produces widgets worth at least $400 per week. Then it stops hiring, because more workers are not worth the $400 they cost. There is no "Help Wanted" sign in its window.
Now consider Shareco, a widget manufacturer that, rather than paying a fixed wage, pays its workers a fixed percentage of its proceeds from sales. Suppose that Wageco and Shareco each employ 1,000 workers to produce 100,000 widgets per week, and that these widgets sell for $500,000. Since Wageco pays each worker $400/week, its weekly payroll is $400,000. If Shareco gives its workers 80 percent of its sales proceeds, the two firms will have the same labor costs (since 80 percent of $500,000 is $400,000).
But while labor is equally costly on average to each firm, things are quite different on the margin. If an unemployed worker arrives at Wageco's door offering to work at the going wage, the company will not be interested because he is not worth the $400/week that he costs.
But Shareco will be interested. Shareco's management knows that hiring the 1,001st worker will add only $400 to its weekly revenue; it also knows that it will have to pay out only 80 percent of this additional revenue, or $320 to its workers, leaving $80 in new profits. So Shareco sees each prospective new worker as a little profit center. Its "Help Wanted" sign is always up.
What accounts for this difference? In a share system, but not in a wage system, each old employee automatically gets a minuscule pay cut whenever an additional worker is hired. (In the Shareco example, total payments to labor rise to $400,320 per week when the 1001st worker is hired. That comes to $399.92 per worker, which is eight cents less than $400 per week). These tiny pay cuts give firms in a share system an extra incentive to expand employment.
While workers might not relish even small pay cuts, they have much to gain from the switch to a share system. In a wage system, layoffs are common, jobs are often hard to find, and work places are often dull, grimy or even hazardous. But a share system is the natural enemy of unemployment, and the labor market it would spawn would be much more inviting.
Due to the chronic shortage of labor in a share system, layoffs would be rare and firms would be constantly on the prowl for new workers. They might put as much effort into recruiting as they now put into finding customers for their products. (Imagine Help-Wanted ads during the Super Bowl!) And they would strive to make the work environment as pleasant and attractive as possible, so that employees would not leave.
Weitzman also argues that a share economy is naturally more resistant to inflation than a wage economy and has other virtues as well. But I cannot summarize this thought-provoking book in a single column.
If all of this sounds like the dream world of an academic scribbler, we need only look across the Pacific to Japan -- which is the one major industrial country that has been using something like a share system for decades. There, unemployment has been low, inflation has been moderate, labor- management relations are excellent, and productivity growth has been little short of miraculous. A coincidence? Perhaps. But Martin Weitzman doubts it, and so do I.