Worker participation in firm decisions: constraining or enabling institution?
The recent economic crisis was accompanied by severe labour market conditions in many European countries, with current unemployment rates of more than 10% in 12 Member States. According to Eurostat, the average unemployment rate in the EU-27 rose by more than 46% between 2008 and 2014. In a market economy, such a change is the aggregate outcome of multiple decentralized firm-level decisions in response to shocks.
Recent survey evidence on firms’ responses to the Great Recession shows that employment reductions were relatively more frequent than other labour-cost cutting strategies (reduction in hours worked per employee, reduction in baseline and flexible wage components) among European firms. The fraction of firms choosing layoffs of permanent employees as the “most important” strategy also increases with the severity of the shocks. An usual approach among economists is to blame collective bargaining institutions for the inability of firms to adjust wages downwardly. However, the presumed relationship between downward wage rigidity and high collective bargaining coverage is far from being convincingly identified in empirical work. Interestingly, in deciding whether to pay lower wages to new hires, European firms appear to also be strongly constrained by internal “efficiency wage” considerations, i.e. factors associated with the enforcement of labour discipline at the point of production (fairness of compensation policies, reputation, wage-effort nexus).
Indeed, largely overlooked in this debate is the fact that the way in which firms cope with negative sectoral and macroeconomic shocks may be affected by their internal organization. This is not surprising considering the widespread practice in macroeconomic modelling of relying on a highly simplified specification of the firm, in which crucial organisational details are missing. In particular, the way in which employee information, consultation and representation provisions – key set of rules that characterises the industrial relations systems of many European countries – interact with wage-setting institutions to determine firm-level adjustments is still not fully understood.
Related research comparing employment and wage responses of worker cooperatives, i.e. firms in which managerial decisions are fully controlled by their workforce, and conventional firms shows that cooperatives exhibit more stable employment and more flexible wages than their conventional counterparts. This suggests that employee involvement in firm decisions can provide incentive-compatible ways of internalising employee preferences for job over income stability. As employee participation seems to affect the way firms distribute market shocks between employment and wages, it may also have interesting macroeconomic and welfare implications.
The potential role of worker participation in fostering microeconomic flexibility becomes more clear once the presence of informational asymmetries between firm owners and employees is adequately acknowledged. Asymmetric information exists when one party of an economic transaction has more, better or just different information than the other. While there are plenty of examples of asymmetric information in everyday social and economic life, the labour market – the core market in a capitalist economy – provides a very important one. Management may have incentives to misinform workers about the situation of the enterprise and to use this information strategically. This possibility in turn may generate distrust and make it difficult to establish credible commitments between the parties. Workers may not disclose productivity-enhancing initiatives for fear that the firm will use that information against them. For example, workers may fear that higher productivity will jeopardize their jobs or that wage concessions in bad times will not be compensated with higher wages in good times. Such commitment problems may become more salient during economic downturns, when firms need to reduce costs, resulting in an inefficiently high level of layoffs. For instance, if managers do not have the obligation of informing and negotiating mass redundancy plans with employees -as they would in participatory workplaces- employees’ ideas regarding alternative cost-saving solutions that management fails to see (as they are usually based on private shop-floor information generated as a result of the production process) are less likely to be considered and implemented. For these reasons, worker participation through various forms of institutionalised involvement in decisions may be associated with effective employment-stabilising mechanisms during recessions.
Institutions favoring worker participation at the workplace level implement a change in property relations as they transfer certain control rights from firm owners to employees. From an economic point of view, and setting aside potentially desirable distributional consequences, this may constrain in some circumstances the ability of firm owners and managers to respond to market signals efficiently. But such a relaxation in property rights may also act in socially beneficial ways. As mentioned, worker participation may help to mitigate commitment problems within firms and provide flexible adaptation mechanisms in a second-best world in which incomplete contracting problems are pervasive. Whether the constraining or enabling effect of worker participation prevail is an open empirical question.