Few words on John McDonnell’s proposal to put 1% to 10% of large companies’ equity into a “inclusive ownership fund” for their workers

This week Labour Party’s Shadow Chancellor of the Exchequer John McDonnell proposed to put 1% to 10% of large  companies’ (every company with 250 or more employees) equity into a “inclusive ownership fund” for their workers. According to McDonnell’s plan, these employee ownership schemes in large companies could bring 11 million workers around up to £500 a each year. However, additional income would be capped at £500 and extra dividends would go to a public fund that would contribute public services and welfare. McDonnell expects that inclusive ownership fund would increase labour productivity and encourage long-term thinking.

McDonnell’s inclusive ownership fund seems more like a profit sharing scheme rather than wealth redistribution, as the workers will not be allowed to trade their shares. Well, we know that the impact of rising wage share on economic growth is case dependent. However, McDonnell’s proposal immediately reminded me of Gilberto Lima’s great paper on profit sharing in which he shows profit sharing in any case increases productivity, capacity utilisation and growth. (Lima’s Metroeconomica paper is here)

Indeed, the positive effects of profit sharing is not only emphasised by heterodox economists (or left loonies). A large number of empirical studies find positive effects of profit sharing. Here famous economist Martin Weitzman from Harvard University and Douglas Kruse who worked as an advisor for Obama summarises the empirical work based on firm level data and conclude that “the general picture that emerges from the econometric studies is that profit sharing and productivity are positively related”.

John McDonnell’s proposal also says that the shares in “inclusive ownership fund” will also be managed collectively by the workers. Hence, the workers will have a word on the decision-making processes. This seems like a proposal from another world! However, lets not forget that the ‘successful’ and ‘productive’ German economy still follows the codetermination system in which the worker representatives are present in the board of directors of the large companies.