A Bit of Co-Determination Economics – Conversable Economist

The joint definition refers to the direct participation of workers in the management and management of firms. In economic theory, arguments can be made for both positive and negative consequences of co-definition. The point is that workers have detailed information about real jobs and processes that management can never fully match; moreover, workers will always worry about whether they will be replaced by technology or cheaper workers. Thus, if collaborative definition offers workers an incentive to use their detailed knowledge in a way that benefits the firm, and also offers workers incentives to invest in their relationship with their employer, this could open up opportunities for increased productivity, wages, and profitability.

On the other hand, there is no direct reason for current employees to consider the well-being of either future employees or firm owners. Thus, if co-determination results in workers maximizing their wages now at the cost of less investment in the future of the firm, the firm may end up deadlocked by worker-management disputes and eventually deteriorate.

What does the evidence say? Simon Jaeger, Shaked Noy, and Benjamin Schofer present an overview of the evidence for European rules in What Does a Code Definition Do? (ILR Review, August 2022, 75(4), pp. 857–890). Oddly enough, they are generally ineffective. In order to prepare their conclusion, it is helpful to go back for a moment and describe what is going on. For example, this is a European-style board-level code definition:

Existing board-level representation laws almost always grant workers a minority on the board, typically 20 to 40% of the seats (ETUI 2020). Germany is a notable exception: while German firms with between 500 and 2,000 employees must allocate only 33% of board seats to employees, firms with more than 2,000 employees are subject to “quasi-parity” representation, meaning that 50% of the seats go to workers but shareholders
get a casting vote. Uniquely in Germany, and for historical reasons dating back to the aftermath of World War II, firms with more than 1,000 employees in the metals, coal and steel sectors are subject to full parity representation without voting rights for shareholders.

There is also a “guild representation”:

Shop representation laws vary greatly in the formal powers they give to workers’ representatives. Employers are usually required to inform and consult shop floor representatives in advance about decisions regarding working hours, working conditions, hiring, transferring or firing employees (Aumayr et al. 2011). These requirements do not give employees any significant powers, but may create implicit pressure on employers to reach a consensus with employees. Some countries optional
give shop floor representatives limited rights to apply to labor courts to overturn employer decisions (Van het Kaar 1997; Visser 2021). Several countries, including Germany, Austria, Sweden, Norway, and the Netherlands, are empowering shop floor representatives with more cooperative decision-making power (Visser 2021). For example, in Germany, shop floor “works councils” have the right to participate in decisions about working hours,
agreements, implementation of performance monitoring technology, and performance-based pay (Addison, Schnabel, and Wagner, 2001). They can also veto “unreasonable” dismissal of employees, in which case the employer must take the case to the labor court if it wants to override the veto.

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

The available micro-evidence indicates no or negligible 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 country studies of the general equilibrium of co-definition reforms between the 1960s and 2010s, finding no effect on aggregate economic outcomes or the quality of industrial relations. They offer three explanations for the institution’s limited influence. First, existing co-determination laws give little power to workers. Second, countries with co-determination laws have a high base level 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 suggests, the difficulty in evaluating a joint definition is that it is bundled with other regulations and laws. In a country where co-determination is a constant situation, both managers and workers will definitely get used to it. In a country with a joint definition, as well as a broad union membership and power, isolating the effect of a joint definition can be difficult. Thus, it is not easy for American proponents of co-definition to figure out its implications in the very different context of US labor relations.

I believe that many of the co-determination arguments tend to escalate into discussions about whether employees should have much more decision-making power in the management of the firm. Some approve of this outcome; some don’t. My point is that co-definition in the European sense is not really about a drastic shift in the power of workers over corporations: instead, it is more accurately seen as providing the necessary and formalized structure for the flow of information and feedback so that workers and management are driven into forums where to communicate with each other.