Financial Participation: Does the Risk Transfer Story Hold in France?

Publication Date01 Mar 2016
AuthorRihab Bellakhal,Leila Baghdadi,Marc‐Arthur Diaye
Financial Participation: Does the Risk
Transfer Story Hold in France?
Leila Baghdadi, Rihab Bellakhal and
Marc-Arthur Diaye
Several articles report a positive effect of financial participation (profit sharing
(PS) and employee share ownership) on firms’ economic performance. This
increase can be obtained in two main ways: by increasing the effort (extrinsic,
intrinsic or commitment) of workers, directly or indirectly through worker
selection; or by transferring more risk to the workers. The question is, of course,
not neutral. Indeed, if the risk transfer story is true then it means that the
increase of economic performance is obtained at the expense of workers, who
take on the burden of more risks. The question is especially important in France
where financial participation is associated with tax exemption for firms and
where it is forbidden by law to substitute base wage and PS. The purpose of our
article is to use an employer–employee dataset to answer the question of
whether financial participation schemes are mainly designed as a risk transfer
(from firms to workers) device.
1. Introduction
In France, financial participation and especially profit sharing (PS) are a
legacy of the French Council of Resistance (which included a large spectrum
of French politicians from both the left and the right wings) after World War
II. The philosophy behind the setting up of PS was, to quote President
Charles de Gaulle, ‘to share the fruits of growth with employees’. The motto
was ‘one third of the profit for the employees, one third for the firm owners,
one third for investment’. However, in an attempt to avoid base wage/profit
share substitution, French legislators (Article L 3312-4 of the French Labor
Code) forbad firms to substitute the profit share for the base wage. From this
Leila Baghdadi is at the Tunis Business School. Rihab Bellakhal is at the Tunis Graduate School
of Business. Marc-Arthur Diaye is at the University of Evry Val d’Essonne.
© John Wiley & Sons Ltd/London School of Economics 2013. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
British Journal of Industrial Relations
54:1 March 2016 0007–1080 pp. 3–29
doi: 10.1111/bjir.12044
perspective, the profit share is an addition to the base wage, not a substitute.
This point is important and implies, according to Cahuc and Dormont
(1997), that PS cannot be used in France as a device to increase employment
(contrary to Weitzman 1984). This point of view is reinforced by the fact that
Cahuc and Dormont (1997), using a panel dataset including 172 French
industrial companies between 1986 and 1989, show that PS leads to higher
productivity. However this non-substitution principle stipulated by French
Law is not as strict as it looks because it requires only a period of 12 months
of non-substitution between the last payment of any base wage element and
the PS starting date. Moreover, from an empirical standpoint, Mabile (1998),
examining the effect of PS over total and base wages using microeconomic
datasets, argues that despite the non-substitution law, the substitution
actually takes place and PS serves as a wage flexibility device. Mabile’s
results, however, are somewhat doubtful because she does not take into
account the potential bias selection, and it may be the case that firms that
implement financial participation attract specific kinds of workers.
At first glance, this debate looks restricted to a French perspective. In fact,
the stakes are higher and go beyond the French situation. It is a debate between
whether financial participation schemes (PS and employee stock and owner-
ship plan — ESOP) are mainly designed by firms as an incentive device for
workers or as firms-to-workers risk transfer. This debate can be found in
Wadhwani and Wall (1990), Bell and Neumark (1993), Ichino (1994),
Bhargava and Jenkinson (1995), Kruse (1998), Black and Lynch (2000), Azfar
and Danninger (2001), Black et al. (2004), Cappelli and Neumark (2004),
Kruse et al. (2008), Andrews et al. (2010) and Long and Fang (2012). The Bell
and Neumark (1993), Ichino (1994) and Black and Lynch (2000) results are in
favour of the risk transfer story whereas the other articles reject it.
The debate is actually not new and has its roots in the work of Weitzman.
Indeed, in his vision of the share economy, Weitzman (1984) saw PS as a
macroeconomic flexibility tool to reduce unemployment during recessions.
When firms face increasing output fluctuations that may decrease their
profits, PS permits the downward adjustment of the employees’ total wages.
In this sense, PS in Weitzman’s framework permits the transfer of more risks
from firms’ owners to employees and thereby increases or stabilizes the
profits. According to Weitzman, workers accept this risk transfer because the
share economy increases the probability of them keeping their jobs, especially
in a context of recession. Some other studies (Blanchflower and Oswald 1988;
Chang 2006; Cooper 1986; Estrin et al. 1987), while recognizing the role of
risk transfer in the share economy, argue that the reaction of workers to this
risk transfer should not be taken for granted. Indeed, the quantity of risk
transferred by firms to employees depends on both agents’ attitudes towards
risk. For instance, if firms and workers are both risk averse, then the quantity
of risk transferred to employees will be higher than in the case where firms are
risk neutral and workers are risk averse. In other words, workers may not
accept more risk transfers from firms. Why are workers willing to accept
more risk transfer from firms? There are at least two kinds of answer. First,
© John Wiley & Sons Ltd/London School of Economics 2013.
4 British Journal of Industrial Relations

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