Employee participation in financial returns may affect not only productivity, as often argued in the literature, but also the employer's behavior in the labor market, as suggested by Martin Weitzman (e.g., 1984). The main purpose of this study is to empirically investigate the effects of profit sharing plans and employee stock ownership plains (ESOPs) on firm employment fluctuations. The paper develops a theoretical model to assess the role of profit sharing plans and ESOPs on firms' proclivity to hire, retain, and fire employees. Profit sharing plans and ESOPs could affect firm employment either directly or indirectly. Based on the estimates from a rich panel data concerning approximately 2,051 Minnesota firms for the period 1980--1994, we found that both profit sharing plans and ESOPs reduce firm employment variability significantly; yet neither plan shows the capability to make the firm employment growth (hiring) faster. Profit sharing plans appear to increase the employment levels slightly, whereas ESOPs appear to do the opposite although higher ESOP coverage correlates with larger companies. Share firms demonstrate higher wage variability, whereas the wage variability appears to be decreased as ESOP coverage increases. Profit sharing plans were found to inflate average wage payment, but the higher degree of profit sharing participation leads decreased average wage growth rate. The relationship between ESOPs and average wage level is somewhat mixed: ESOP coverage and average wage level were found negatively correlated, but self-reported ESOP firms appear to pay employees slightly more. More investigations have to be done on the dynamic process and the mechanism with which profit sharing plans and ESOPs affect firm employment and pay.
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