Works Councils and Establishment Productivity

Abstract

Declining union density in many industrialized countries increases interest in alternative forms of employee representation, such as works councils. The German works council is one of the most powerful forms of worker representation in developed countries, but little is known of its causal effect on productivity. The author used a large linked employer-employee panel data set to examine this issue. Comparing firms with and without a works council, the author finds that establishments with a works council are on average 6.4% more productive; but he also presents evidence that this figure underestimates the true productivity effect of works councils.

Non-union worker representation, foreign owners, and the performance of establishments

“…While recent studies on German works councils usually obtain a positive productivity effect of establishment-level codetermination, the size of the estimated coefficient differs remarkably across studies. Mueller (2012) finds that the incidence of a works council is associated with a 6% higher productivity. Frick (2002) obtains a substantially larger influence.…”

“…Recent studies indicate that works councils are more likely to be adopted in establishments facing a poor economic situation (Jirjahn, 2009(Jirjahn, , 2010Mohrenweiser et al, 2012;Mueller, 2012). In such situation, councils may help workers protect the quasi rents they have created by their efforts or human capital investments.…”

“…Against this background, we pursue an alternative approach and estimate a treatment-effects model (Jirjahn, 2010;Mueller, 2012). First, a probit model is used to estimate the determinants of works council incidence.…”

“…This is documented by a remarkably increasing number of econometric studies on the consequences of German works councils. Recent examinations typically obtain neutral or positive effects on training, employee retention, productivity, innovation, family friendly practices, and the use of performance pay (Addison et al, 2001;Jirjahn, 2002, 2009;Frick and Moeller, 2003;Huebler and Jirjahn, 2003;Askildsen et al, 2006;Smith, 2006;Kraft, 2007, 2011;Wagner, 2008;Pfeifer, 2011;Mueller, 2012). Yet, sociological case studies indicate that councils do not automatically live up to their potential (Frege, 2002).…”

Why is there resistance to works councils in Germany? An economic perspective

“…More recent studies published since the last comprehensive literature review (Jirjahn, 2011) support the conclusion that correlations between the works council and productivity are largely positive (Brändle, 2013;Hübler, 2015;Jirjahn and Müller, 2014;Müller, 2012Müller, , 2015Pfeifer, 2011). To obtain a complete picture, however, two points must be taken into account:…”