Some Economics of Codetermination

Codetermination refers to the direct worker involvement in management and governance of firms.

In economic theory, one can make an argument for either positive or negative effects of codetermination. The case in favor is that workers have detailed information about actual jobs and processes in a way that management can never quite match; in addition, workers will always have some concern about whether they are likely to be replaced by technology or by cheaper workers. Thus, if codetermination offers an incentive for workers to tap into their detailed knowledge in a way that benefits the firm, and also offers incentives to workers to invest in their relationship with the employer, it could unlock productivity, wage, and profitability gains.

On the other side, current workers do not have a direct reason to take the welfare of either future workers or the owners of the firm into account. Thus, if codetermination leads workers to maximize their wages now, at the cost of lower investments in the future of the firm, the firm can end up immobilized by worker-management disputes and ultimately worse off.

What does the evidence say? Simon Jager, Shakked Noy, and Benjamin Schoefer provide an overview of the evidence on European rules in “What Does Codetermination Do?” (ILR Review). Perhaps strangely, they find little effect at all. To set up their conclusion, it’s useful to backfill for a moment and describe what’s involved. For example, this is board-level codetermination, European-style:

Existing board-level representation laws almost always grant workers a minority position on the board—usually 20 to 40% of the seats (ETUI 2020). The notable exception is in Germany: Although German firms with between 500 and 2,000 employees must allocate only 33% of board seats to workers, firms with more than 2,000 employees are subject to ‘‘quasi-parity’’ representation, meaning that 50% of seats go to workers, but shareholders receive a tie-breaking vote. Uniquely to Germany and for historical reasons going back to the aftermath of World War II, firms with more than 1,000 employees in the iron, coal, and steel sectors are subject to full parity representation, with no casting vote for shareholders.

There is also “shop-floor representation:”

Shop-floor representation laws vary widely in the formal authority they give to worker representatives. Employers are usually required to inform and consult shop-floor representatives in advance about decisions regarding working hours, working conditions, or the recruitment, transfer, or dismissal of employees (Aumayr et al. 2011). These requirements do not convey any substantive authority to workers, but may create implicit pressure on employers to reach a consensus with workers. Some countries additionally give shop-floor representatives narrow rights to appeal to employment courts to overturn employer decisions (Van het Kaar 1997; Visser 2021). Several countries, including Germany, Austria, Sweden, Norway, and the Netherlands, grant shop-floor representatives more substantive co-decisionmaking powers (Visser 2021). For example, in Germany, shop-floor ‘‘works councils’’ have a right to participate in decisions about working hours, leave arrangements, the introduction of productivity-monitoring technology, and performance-related pay (Addison, Schnabel, and Wagner 2001). They can also veto ‘‘unwarranted’’ dismissals of staff, in which case the employer must bring the matter to a labor court if they wish to override the veto.

From the abstract, the authors sum up the evidence on board- and shop-level codetermination this way:

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

As this explanation implies, a difficulty in evaluating codetermination is that it comes packaged with other attitudes and laws. In a country with codetermination as an ongoing situation, both management and workers will necessarily become accustomed to it. In a country with codetermination and also widespread union membership and power, separating out the effect of codetermination may be difficult. Thus, for American advocates of codetermination, figuring out its effects in the very different context of US labor relations isn’t straightforward.

My own sense is that many of the arguments over codetermination tend to get into discussions of whether workers should have much greater decision-making power in firm governance. Some favor that outcome; some don’t. My point is that co-determination in the European sense isn’t actually about decisive shifts in worker power over corporations: instead, it’s more accurately viewed as providing a required and formalized structure for flows of information and feedback, so that workers and management are forced into forums where they communicate with each other.