Perhaps the most conspicuous evidence of malfunctioning in the labour market has been the ‘stagflation’ of recent years, in Western Europe and the USA. The problem has been so prolonged and so persisent that some analysts, in particular Martin Weitzman have become convinced that it can only be cured by altering the method by which pay is determined. In a number of forceful papers and a book (see Weitzman, 1984, 1985, 1986, 1987) Weitzman has proposed that governments should encourage the introduction of economy-wide profit-sharing to replace the traditional fixed-wage system. This proposal has attracted considerable interest, and was an important factor in the British government’s decision to subsidise profit-related pay (PRP) in the 1987 Finance Act. Our aim in this chapter is to review Weitzman’s proposals and the empirical evidence to date on the topic, as well as to consider the other effects of alternative remuneration systems.
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