Would Unemployment Drop If Wages Were Tied to a Firm’s Profits?

BY Paul Solman  October 22, 2010 at 3:38 PM EST

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s Friday’s query:

Name: Dr. Morris Weinberger

Making Sense

Question: Could unemployment be ameliorated by using the “short” method of reducing employee salaries instead of wholesale firings? How much of an impact would use of “shorting” have in reducing national unemployment??

Paul Solman: We’ve addressed this issue, Dr. Weinberger, in a story last year.

But the idea has been around for a long time, formalized by economist Martin Weitzman in a 1984 book , “The Share Economy.” Weitzman argued that if wages were flexibly tied to a firm’s profits (or losses), there would be a lot less unemployment, much as you suggest.

This entry is cross-posted on the Making Sen$e page _Follow Paul on Twitter._