This paper uses longitudinal data provided by a large unionized grocery store chain to examine the relationship between profitability and compensation adjustments between 1976 and 1985. Consistent with the predictions of a Nash bargaining model, negotiated compensation adjustments were inversely related to the pre-negotiation operating income of the relevant stores. Concessionary compensation adjustments in response to relatively low levels of prior profitability occurred in the first year of contracts and subsequent compensation growth was unaffected by differences in prior profitability. Decreases in compensation rates led to significant improvements in subsequent economic performance. Estimates of this relationship, however, indicate that the impact of compensation adjustments on profitability changes was less than dollar-for-dollar.
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