Some economic aspects of co-determination

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Co-determination refers to the direct participation of workers in the management and governance of companies.

In economic theory, one can argue positive or negative effects of co-determination. The argument for this is that workers have detailed information about actual tasks and processes in a way that management can never match; moreover, workers will always have some anxiety about whether they are likely to be replaced by technology or by cheaper workers. So if co-determination incentivizes workers to leverage their detailed knowledge in a way that benefits the firm, and also incentivizes workers to invest in their relationship with the employer, it could unlock gains in productivity, wages and profitability.

On the other hand, current workers have no direct reason to consider the welfare of future workers or business owners. Thus, if co-determination causes workers to maximize their wages now, at the cost of less investment in the future of the company, the company may become immobilized by conflicts between workers and management and, ultimately, worsen .

What does the evidence say? Simon Jager, Shakked Noy and Benjamin Schoefer provide an overview of evidence on European rules in “What Does Codetermination Do?” (ILR Review, Aug 2022, 75(4), pp. 857–890). Perhaps strangely, they find little effect at all. To set up their conclusion, it helps to fill in a moment and outline what is involved. For example, this is co-determination at council level, European style:

Existing laws on board representation almost always grant workers a minority position on the board, typically 20-40% of the seats (ETUI 2020). The notable exception is Germany: although German companies with between 500 and 2,000 employees only have to allocate 33% of board seats to workers, companies with more than 2,000 employees are subject to representation. “quasi-parity”, which means that 50% of the seats go to the workers, but the shareholders receive a deciding vote. Only in Germany and for historical reasons dating back to the aftermath of the Second World War, companies with more than 1,000 employees in the iron, coal and steel sectors are subject to full equal representation, without a casting vote for shareholders.

There is also a “workshop representation:”

Shop representation laws vary considerably in the formal authority they give to workers’ representatives. Employers are generally required to inform and consult with shop floor representatives in advance about decisions about working hours, working conditions, or hiring, transferring, or firing employees (Aumayr et al. 2011). These requirements do not confer any substantial authority on workers, but may create implicit pressure on employers to reach consensus with workers. Some more countries
give shop representatives limited rights to appeal to labor courts to overturn employer decisions (Van het Kaar 1997; Visser 2021). Several countries, including Germany, Austria, Sweden, Norway and the Netherlands, grant workshop representatives greater co-decision powers (Visser 2021). For example, in Germany, shop floor “works councils” have the right to participate in decisions about working hours, holidays, the introduction of productivity monitoring technology, and performance-related pay. (Addison, Schnabel and Wagner 2001). They can also veto “unjustified” dismissals, in which case the employer must take the matter to a labor court if they wish to override the veto.

From the abstract, the authors summarize the evidence on co-determination at the board and shop floor level as follows:

Available microeconomic evidence indicates no or small positive effects of co-determination on worker and firm outcomes and leaves room for moderate positive effects on productivity, wages, and job stability. The authors also present new studies of country-level general equilibrium events on co-determination reforms between the 1960s and 2010, finding no effect on overall economic outcomes or the quality of industrial relations. They offer three explanations for the limited impact of the institution. First, existing co-determination laws confer little authority on workers. Second, countries with co-determination laws have high baseline levels of informal worker voice. Third, co-determination laws may interact with other labor market institutions, such as union representation and collective bargaining.

As this explanation implies, a difficulty in evaluating co-determination is that it comes with other attitudes and laws. In a country where co-determination is a permanent situation, both management and workers will necessarily get used to it. In a co-determination country where union membership and power is widespread, separating the effect of co-determination can be difficult. Thus, for American proponents of co-determination, determining its effects in the very different context of labor relations in the United States is not straightforward.

My own feeling is that many of the arguments about co-determination tend to get into discussions about whether workers should have much more decision-making power in corporate governance. Some are in favor of this result; some don’t. What I mean is that co-determination in the European sense is not actually about decisive changes in the power of workers over companies: rather it is seen as providing a required and formalized structure for the flows of information and feedback, so that workers and management are forced into forums where they communicate with each other.

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