The Introduction of Works Councils in German Establishments — Rent Seeking or Rent Protection?
| Author | Uwe Jirjahn |
| Published date | 01 September 2009 |
| Date | 01 September 2009 |
| DOI | http://doi.org/10.1111/j.1467-8543.2009.00734.x |
The Introduction of Works Councils in
German Establishments — Rent Seeking
or Rent Protection?bjir_734521..545
Uwe Jirjahn
Abstract
Some recent empirical studies seem to suggest that German works councils
engage in rent-seeking activities rather than in the creation of joint establish-
ment surplus. However, those cross-sectional studies do not address the issue of
causation. We address this issue by investigating the factors that influence the
employees’ decision to introduce a works council in their establishment. Coun-
cils are more likely to be adopted in establishments with a very poor sales
situation and poor employment growth. They are also more likely to be adopted
in establishments where management does not pursue an expansive market
strategy. Altogether, our results support the hypothesis that employees intro-
duce works councils to protect the quasi-rents they have created by their efforts
and human capital investments.
1. Introduction
German works councils have attracted considerable attention as an alternative
form of worker representation to promote industrial democracy and to
improve both the quality of working life and economic performance. Yet some
recent empirical studies seem to suggest that works councils engage in rent
seeking activities rather than in the creation of joint establishment surplus.
Works councils appear to be associated with lower profitability (Addison et al.
2001), reduced employment growth (Addison and Teixeira 2006) and an
increased probability of plant closure (Addison et al. 2004). However, those
cross-sectional studies do not address the issue of causation. If the establish-
ment faces shrinkage of its market or severe financial distress due to poor
management, workers may have an increased interest in introducing a works
council to protect the quasi-rents they have created by their efforts and human
capital investments. In this case, the presence of a council is not the cause of
Uwe Jirjahn is at Leibniz University of Hannover, Germany.
British Journal of Industrial Relations doi: 10.1111/j.1467-8543.2009.00734.x
47:3 September 2009 0007–1080 pp. 521–545
© Blackwell Publishing Ltd/London School of Economics 2009. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
low profits or reduced employment growth. It rather reflects the crisis that has
caused the actual economic situation of the establishment.
This point is related to research on unions and employment growth in
Britain. While Blanchflower et al. (1991) found evidence for a negative asso-
ciation between unions and employment growth, Machin and Wadhwani
(1991) showed that the association disappears once endogeneity of unioniza-
tion has been accounted for. The results by Machin and Wadhwani support
the hypothesis that workers in shrinking firms demand unions to reduce the
risk of being sacked unfairly.
This article attempts to address the issue of causation by investigating the
factors that influence the introduction of works councils in German estab-
lishments. The introduction of a council depends on the initiative of the
establishment’s workforce. Our specific focus is on the economic situation
preceding the employees’ decision to adopt a council. If works councils
primarily play the role of a rent-seeking institution, they should be more
likely to be created in prospering establishments with high rents the workers
can appropriate through a council. Yet if councils rather help employees to
protect their quasi-rents, they should be more likely to be created in estab-
lishments with financial distress where employees face the danger that man-
agers will renege on implicit contracts with the workforce.
We use data on a sample of manufacturing establishments in Germany to
examine the determinants of the introduction of works councils. The esti-
mates show that works councils are more likely to be adopted in establish-
ments with a very poor sales situation and poor employment growth over the
past year. They are also more likely to be adopted in establishments where
management does not pursue an expansive market strategy. These findings
support the hypothesis that employees rather introduce works councils in a
crisis situation to protect the quasi-rents they have created by their efforts
and human capital investments.
While there are an increasing number of studies on German works coun-
cils, little attention has been paid to the determinants of their introduction.
Two exceptions are the studies by Addison et al. (2003) and Dilger (2003).
They do not find a significant association between the establishment’s sales
situation and works council introduction. Most of the estimated coefficients
on the other variables used in those studies are also poorly determined. One
reason might be that the studies take into account only very few explanatory
variables. Variables for market strategy and preceding changes in employ-
ment are not included in the regressions. Moreover, the number of control
variables is relatively small in those studies.
In contrast, our study is based on a broader set of explanatory variables.
Like the coefficients on our variables of primary interest, most of the esti-
mated coefficients on the control variables are well determined. First, the
structure of the workforce plays a role. The proportion of skilled blue-collar
workers is a positive determinant of the adoption of a works council, while
the shares of part-time workers and apprentices are negative determinants.
Second, the managerial environment plays a role. A council is more likely to
522 British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2009.
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