The Dynamic Effects of Works Councils on Labour Productivity: First Evidence from Panel Data

DOIhttp://doi.org/10.1111/bjir.12200
Date01 June 2017
AuthorSteffen Mueller,Jens Stegmaier
Published date01 June 2017
British Journal of Industrial Relations doi: 10.1111/bjir.12200
55:2 June 2017 0007–1080 pp. 372–395
The Dynamic Effects of Works Councils
on Labour Productivity: First Evidence
from Panel Data
Steen Mueller and Jens Stegmaier
Abstract
We estimate dynamic eects of works councils on labour productivity using
newly available information from West German establishment panel data.
Conditioning on plant fixed eects and control variables, we find negative
productivity eects during the first five years after council introduction but a
steady and substantial increase in the councils’ productivity eect thereafter.
Our findings support a causal interpretation for the positive correlationbetween
council existence and plant productivity that has been frequently reported in
previous studies.
1. Introduction
How to improve competitiveness is one of the core questions for not
only individual managers and firm owners but also entire societies. Given
the high labour productivity of the German economy compared to other
developed countries, it is natural to ask for the reasons for the German
success and the role of industrial relations and labour market institutions.
Germany’s powerful works councils have been subject of many empirical
studies examining plant productivity but unambiguous evidence on the
causal eect of councils is hard to pin down given possibly endogenous
council introductions and the persistence of this institution within plants over
time.
We use an event study approach to estimate dynamic eects of German
works councils on labour productivity using panel data and newly available
information on council age. The evolution of council eects within plants is
interesting per se but it is additionally quite suggestive regarding causality
Steen Mueller is at Halle Institute for Economic Research(IWH) and Magdeburg University.
Jens Stegmaier is atthe Institute for Employment Research (IAB) and is research aliateat Halle
Institute for Economic Research(IWH).
C
2016 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.
Dynamic Eects of Works Councils on Labour Productivity 373
as one interpretation of the frequently reported positive correlation between
council existence and plant productivity. Intuitively, it is hard to argue that
productivity improvements related to works council age have nothing to do
with what the council is doing.
Works councils are an integral part of the industrial and labour relations
system in a number of industrialized countries, including Canada, Germany
and Korea. In Germany, they provide a highly developed mechanism for
employer–employee communication and negotiation at the plant level. The
potential to improve worker representation and to increase plant productivity
has directed considerable attention to German-style works councils in
countries where union density has declined and international competition
has increased. For instance, in the 1990s the United States experienced a
substantial political and scientific debate about whether German-style works
councils could be a means to improve industrial relations and productivity in
the US (see, e.g., Rogers and Streeck (1995) or the final report of the Dunlop
Commission on the Future of Worker-Management Relations initiated by
the US Department of Labor (1994)). The earlier US debate faded without
legislative changes, which might partly be due to the uncertainty about the
economic consequences of formalized participation. However, also without
being at the top of the political agenda the debate is still active. In February
2014, workers at Volkswagen in Chattanooga (Tennessee) voted against the
adoption of German-style works councils. One reason for this result might
be the opposition of Republican politicians and conservative lobby groups
who organized a high-profile public campaign against worker representation
at Volkswagen.
A considerable number of econometric studies have analysed the economic
consequences of German works councils. One part of this literature estimates
eects on plant productivity (Addison et al. 2001; Mueller 2012), profitability
(Addison and Wagner 1997; Beckmann and Kraekel 2012; Mueller 2011)
or wages (Addison et al. 2010). More recent studies typically find higher
productivity and higher wages as a result of works councils but are
split as to their eect on profits. Although it is known that employee
participation may have dynamic eects on firm performance (Jirjahn et al.
2011; Kato 2006), it has long been neglected that dynamics in the council
eect can be a valuable source of variation to understand whether the
frequently reported positive correlation between council existence and plant
performance is spurious or whether councils really improve productivity.
Conditioning on plant fixed eects and a variety of control variables,
we find negative productivity eects during the first five years after
council introduction but a steady increase in the eect thereafter. We do
not find positive pre-treatment trends in productivity and conclude that
the long-run within-plant increase in productivity can be attributed to
enduring works council existence and the changes councils cause within
establishments. Our results suggest that the competitiveness of the German
economy is strengthened by the presence of formalized non-union worker
representation.
C
2016 John Wiley& Sons Ltd/London School of Economics.

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