Employment and Share Trade under Employee Share Ownership: An application to transition economies

Abstract

The paper focuses on internal markets for shares in employee-owned firms, with special reference to Eastern Europe. It is proposed that shares should be viewed as implicit employment guarantees. This view provides new results on employment decisions and dynamics of internal share trade. When the firm has surplus labour, the tradability of shares ensures that employment adjusts to the socially optimal level. Those employees who lose their jobs receive full compensation for unemployment costs when selling their shares. The tradability of shares provides useful signals of the outside opportunities of labour. The paper also discusses the limitations of the model in the context of East Europe.