The Effect of Employee Stock Ownership on Wage and Employment Bargaining

When workers can bargain over wages and employment, standard insider-outsider models predict underemployment if the number of insiders is small and overemployment if the number of insiders is large. For instance, a union will restrict employment growth in an expanding firm and oppose layoffs in a contracting firm. This paper shows that employee stock ownership can solve both problems and that the necessary ownership share is often relatively small. The results are compared with related results in the literatures on profit-sharing and labor-managed firms