ABSTRACT:This paper considers the claim thatexplicitprofit sharing reduces the marginal cost of labour This is contrasted with the view thatimplicitprofit sharing occurs through wage bargaining Using a microeconomic data set from the UK we find no evidence that the introduction of profit sharing reduces base wages and hence the marginal cost of labour However firm profitability is found to have a positive effect on wages which supports the hypothesis of implicit profit sharing through wage bargaining These findings suggest that it is hard to justify the favourable tax treatment of profit related pay found in the UK