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Mandated Works Councils and Firm Performance: Labor Productivity and Personnel Turnover in German Establishments
Journal of Contextual Economics – Schmollers Jahrbuch, Vol. 123 (2003), Iss. 3 : pp. 423–454
25 Citations (CrossRef)
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Frick, Bernd
Möller, Iris
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Abstract
Traditionally, works councils have been viewed by most economists as welfare reducing cartels that inhibit firms from allocating their resources efficiently. This view has been challenged recently: To the extent that a works council can convince a firm's employees to accept decisions and measures that seem to violate their interests, mandated codetermination is likely to overcome the problems inherent in a "prisoner's dilemma" situation, where credible commitments are impossible to be made without the support of an exogenously implemented institution.
This latter view is supported by the evidence presented in the empirical part of the paper: First, a review of the literature on the influence of works councils on investments in "intangible assets" suggests that concentrating on investments in physical capital, on productivity, profitability, investments, and some other easy to measure indicators of firm performance may lead to a considerable underestimation of the positive effects of mandated works councils. Second, the presence of a works council has a positive and statistically significant influence on labor productivity as well as a significantly negative influence on personnel turnover in German frrms. The respective coefficients indicate that these effects are in some cases quite large and that they differ considerably between industry and service sectors as well as between East and West German firms.