Search for a Miracle Cure

By Charles P. Alexander.

M.I.T. Economist Martin Weitzman may at first appear to be his profession's version of a snake-oil salesman. In his new book The Share Economy (Harvard; $15), Weitzman claims to have found a cure-all that will end both unemployment and inflation. The trick, he says, is for U.S. industry to abandon the practice of paying fixed wages and adopt a scheme that would compensate workers in relation to their employers' revenues or profits.

Weitzman's prescription may sound simplistic and his goals unrealistic, but the book is being widely discussed by economists and businessmen, and some reviewers are already hailing it as a breakthrough in economic theory. John Roemer, an economist at the University of California, Davis, calls it "one of the most exciting books in economics I have read in several years." In an editorial, the New York Times dubbed Weitzman's proposal the "best idea since Keynes."

Weitzman focuses on the U.S. economy's recurrent bouts of stagflation, that mysterious malady in which growth falters but prices continue to rise. The main cause, he says, is the almost universal practice of paying employees fixed wages, often set by contract. When sales slow down during a recession, companies are reluctant to cut prices because they find it difficult to reduce wages and often in fact must increase them. Instead, managers frequently choose to slash production and lay off employees. Thus unemployment rises even as wages go up, and inflation persists.

But suppose, says Weitzman, that workers agreed to accept a share of the company's revenues or profits--two-thirds, for example--as compensation in lieu of set wages. That money would be divided among all employees. When revenues dipped during a slump, workers' income would drop accordingly, and the firm could then reduce prices to revive sales. Because all the workers take a temporary cut, no one would have to be laid off. The burden of the recession would be shared by the entire work force.

Weitzman contends that even in good times, fixed wages are a barrier to increased employment. Companies today are afraid to hire too many new employees because they do not want to be stuck with them when the economy turns down. But in a share system, says Weitzman, the company would have more incentive to hire new employees. The workers would be there to help when business is good, but they would not be a drag on earnings when it is bad because the employees' average pay would fall along with revenues. Workers might be willing to take a pay cut in exchange for job security. "Firms ever hungry for labor," writes the economist, would be "always on the prowl --cruising around like vacuum cleaners on wheels, searching in nooks and crannies for extra workers."

The economist admits that his plan would not succeed if only a few companies adopted it. These firms would hire large numbers of new workers, and because the revenue pie would be split into many more pieces, the average pay might be reduced to levels that employees would not accept. But Weitzman argues that if many corporations embraced the share system, the pool of qualified people looking for work would be depleted fairly quickly. Each company would then be able hire only a relatively few workers, but the overall impact would be a large boost in employment throughout the economy.

The major practical problem with Weitzman's plan is that it is not attractive to workers with seniority who are in little danger of being laid off during a recession. Many of them would undoubtedly make less money in a share economy than they do now. For that reason, labor unions are decidedly cool toward the proposal. Says Murray Seeger, director of information for the AFL-CIO: "This scheme would continue the suppression of workers' earnings." Weitzman says the Government would have to lead the way in overcoming worker opposition. He suggests that employees who accept a share plan be given income tax breaks similar to the preferential treatment of capital gains.

Some businessmen also dispute Weitzman's reasoning. They argue that companies cannot add employees unless demand for their products increases. "Weitzman has a utopian idea," says Kevin O'Donnell, president of SIFCO Industries, a metalworking firm based in Cleveland. Many economists praise the theoretical elegance of Weitzman's plan, but doubt that it could be put into practice any time soon, if at all. Says David Glasner, a senior fellow at the Manhattan Institute for Policy Research: "Workers simply prefer having a known wage rate and do not want to take the risk of a variable income." Contends Melvin Reder, a professor of urban and labor economics at the University of Chicago's Graduate School of Business: "Weitzman's proposal is like the advice of a philosopher to a King, not to a President and Congress in a democratic society."

The economist acknowledges that his plan is unlikely to be used in its pure form, but says that even a modified version would be a strong tonic for the American economy. Companies, for example, could guarantee a base wage and then offer variable bonuses that would be a share of profits or revenues. More than 350,000 U.S. companies already offer limited profit sharing, though employees often do not receive the money until they leave the company. Some firms, including General Motors and Ford, have started to give out annual profit- sharing checks. GM last year gave a typical employee $550, while Ford paid about $2,000.

Weitzman cites Japan's economy as proof that a share system can work. In many Japanese corporations, as much as half of a worker's pay comes in the form of a bonus that is tied to the company's profits or revenues. That makes workers' annual income somewhat unpredictable, especially in bad times, but the country's unemployment rate is only 2.7%, and layoffs are rare. In addition, the Japanese have a reason to work hard and strive for quality because some of their pay is linked to the company's fortunes. Widespread use of profit sharing, says Weitzman, is one part of the Japanese success story that the U.S. can easily and profitably emulate.

With reporting by Gisela Bolte/Washington and Rosemary Byrnes/New York