Owner‐Managers and the Failure of Newly Adopted Works Councils
| DOI | http://doi.org/10.1111/bjir.12148 |
| Published date | 01 December 2016 |
| Date | 01 December 2016 |
British Journal of Industrial Relations doi: 10.1111/bjir.12148
54:4 December 2016 0007–1080 pp. 815–845
Owner-Managers and the Failure of
Newly Adopted Works Councils
Uwe Jirjahn and Jens Mohrenweiser
Abstract
Using representative data from the IAB Establishment Panel, we show that the
managerial environment has a strong influence on the introduction and survival
of works councils. Employees in owner-managed establishments are less likely
to introduce a works council. Moreover, in case of an introduction, the new
works council is less likelyto survive if the establishment is owner-managed. The
pattern of results even holds in situations that involve positive economic eects
of works councils. This suggests that owner-managers oppose works councils
not primarily for economic reasons. Our findings are rather consistent with the
hypothesis that owner-managersoppose co-determination because it reduces the
utility they gain from being the ultimate bosses within the establishment.
1. Introduction
Works councils provide a highly developed mechanism for establishment-
level co-determination (Freeman and Lazear 1995; Smith 1991, 2006). Recent
econometric studies on works councils in Germany suggest that they have
the potential to increase both worker utility and economic performance.
These studies typically obtain neutral to positive eects on job satisfaction,
employee retention, family friendly practices, training, flexible working time
arrangements, capital utilization, performance pay, innovation, investment
and productivity.1Yet, despite these favourable outcomes, the overwhelming
majority of eligible establishments do not have a works council. Ellguth and
Kohaut (2009) estimatethat councils are present in only 10 per cent of eligible
establishments.2This gives rise to the question as to what factors contribute
to the low incidence of works councils.
Using representative data from the IAB Establishment Panel, our study
examines the role of owner-managers in the introduction of works councils
Uwe Jirjahn is at the Department of Economics, University of Trier, Germany. Jens
Mohrenweiser is at Bournemouth University, UK.
C
2015 John Wiley& Sons Ltd/London School of Economics. Published by John Wiley & Sons Ltd,
9600 Garsington Road,Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
816 British Journal of Industrial Relations
and in the dissolution of newly adopted works councils. A plain reading
of the Works Constitution Act (WCA), the law that governs the works
council systems, may suggest that the managerial environment should have
no influence on the adoption or dissolution of a works council. Our study
demonstrates that the managerial environment de facto has an important
influence. We find that establishments with owner-managers have a lower
probabilitythat employees introduce a works council. Moreover,we show that
in case of an introduction, the new works council is less likely to survive if
the establishment is run by an owner-manager. These results also hold true
in exploratory instrumental variable estimates accounting for the possible
endogeneity of the presence of owner-managers.
We examine two alternative explanations for our findings. On the one
hand, owner-managers are managers who are the residual claimants of the
establishment. Thus, they may have a stronger incentive than hired managers
to oppose works councils when there are concerns that co-determination
harms profitability. On the other hand, owner-managers may oppose works
councils because co-determination reduces the utility they gain from being
the ultimate bosses within the establishment.
Considering the performance-enhancing works council eects found in
recent studies, it may not seem likely that owner-managers oppose co-
determination for profit reasons. However, the positive eects only hold on
average. Recent research has also shown that works council eects depend
on circumstances and type establishment. Thus, our findings may reflect
the resistance of owner-managers in situations entailing negative works
council eects on profitability. To examine this hypothesis, we perform
separate estimates for dierent types of establishments: establishments
with and without collective bargaining coverage, establishments in the
manufacturing and in the service sector, establishments in East and West
Germany, establishments with positive and negative employment growth
and finally establishments of dierent size classes. Previous studies have
found that the economic eects of works councils dier between these types
of establishments. If owner-managers oppose co-determination for profit
reasons, they should have a negative influence on works council adoption and
survival onlyin situations that entail unfavourableeects of co-determination.
Our results do not support this prediction. We find a negative influence of
owner-managers even in situations that lead to positive economic eects of
co-determination. This indicates that our key results cannot be explained
by economic reasons. Owner-managers may oppose co-determination rather
because it limits their discretionary power and reduces their utility frombeing
the ultimate bosses within their establishments.
Our findings give rise to the question as to what steps owner-managers take
to avoidworks councils. Alternative employeeinvolvement practices are often
viewed as substitutes forworks councils. Against this background, we examine
if the negative influence of owner-managers on works council adoption
and survival can be explained by the use of alternative forms of worker
representationvoluntarily implemented by the employer. Our estimatesdo not
C
2015 John Wiley& Sons Ltd/London School of Economics.
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