Profit Sharing as a Bargaining Weapon Against Unions

I show that one reason why employers use profit sharing is to weaken their unions and increase their share of the surplus. I develop a model where by making compensation dependent on output, profit sharing weakens unions’ ability to motivate employees to strike. Unions lose reputation for being strong, which further reduces their bargaining power. Resorting to exogenous variation in the aggressiveness of unions, I show that employers anticipate this increased threat by a larger usage of profit sharing. Its payment leads to a reduction in strike length, and to a drop in wage growth of 13%. The effect is concentrated on lower occupations for whom growth is almost halved