Hillary Clinton’s economic plan: good for businesses, risky for workers

On July 13, Hillary Clinton unveiled her economic agenda. She wants the middle class to get its long over-due raise and a bigger share of the economic pie that’s disproportionately going to the rich. She didn’t go into many specifics on how she’d achieve this, except for one thing: more incentives for profit-sharing at work. The idea would effectively offer employees dividend-paying company stock in place of some portion of traditional salaries.

On its face it sounds like a sensible plan. Profits have soared while economy-wide wages have stagnated. Profit-sharing seems like a direct way to cut the middle class in on the economy’s economic gains. It may even turn out to be good for the economy overall. But the only people who won’t benefit are the middle class.

Theory, and some evidence (pdf), suggests profit-sharing increases productivity by aligning the incentives of workers and management. Getting a piece of profits also is thought to make employees more entrepreneurial and open to taking on more risk at work—which, before the financial crisis, people thought was a good thing. Profit-sharing in a large company will probably not amount to much because a individual worker’s share of profits will be too small (pdf). But even if company profits were a large source of pay, it is less valuable than cash compensation.

The primary benefit of being a salaried employee is that you get a regular, predictable pay-check, regardless of whether the company has a good or bad year. Your employer bears profit risk and provides its employees with income certainty. This certainty is a valuable benefit and it’s an expensive promise for employers to make.

The certainty is especially valuable to middle- to low-wage workers. High-wage workers tend to have more savings to draw on if they have a bad profit-sharing year. Their savings also tend to be well diversified in stock from other companies and real estate. Even if their work pay-check goes up and down, they can get income from other sources. But most middle class Americans are dependent on their paychecks, live check-to-check, and would struggle with more variable pay. Pay based on profit is a pay-cut when you account for risk.

Clinton’s plan is good economics if she wants to boost productivity and, potentially, employment. Variable pay is cheaper for employers, so they might be more inclined to hire people in good times and lay fewer off in a bad year. Profit-sharing means, some years, the middle class might get that elusive pay increase. But it may be followed by a pay-cut the following year. Preferential tax treatment gives employers an incentive to offer a share of profits instead of a more traditional salary increase or a different pay-package for new hires. For many workers with a stable job, it’s a risk not worth taking.

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