March 24, 2015

Do works councils really boost firm productivity?

Do works councils really boost firm productivity?

Evidence shows that works councils:

+    can increase firm transparency, reduce employee turnover rates, and boost general well-being

  • but can also increase conflict and regulation, and lengthen decision making times

Works councils are often seen as controversial, and many argue as to how useful they are in business. The German model has been mimicked by other countries for years – but does this really have a positive influence on productivity?

A new article by Olaf Hübler assesses the various arguments for and against works councils, and finds that the effects that they have on business are mixed. He finds that works councils are more likely to have a positive impact on productivity: if conducted under collective bargaining; if no conflicts of interests between management and works councils exist; and if codetermination is based on voluntary agreements.

However, they may encourage conflicts between employers and employees to rise to the surface, and this can lead to longer decision making times and greater regulation. On average, the effects of works councils have been decreasing over the past 20 years, and productivity of firms with and without works councils are balancing out.

Hübler notes that more research is needed to see if works councils really do have a positive effect. Therefore, he says that policymakers should work to provide necessary resources and appropriate incentives.

Do works councils raise or lower firm productivity? by Olaf Hübler, was published on 24th March 2015.  

IZA World of Labor is a free, online resource created by the Institute for the Study of Labor (IZA) in collaboration with Bloomsbury Publishing Plc. Articles focus on global labor economics issues, drawing on empirical, evidence-based research in order to offer pertinent comment and evaluation, and best-practice policy advice.

Olaf Hübler is professor emeritus at the Institute for Empirical Economics at the Leibniz University of Hannover. He is also a member of the Econometric Society, and the American and European Economic Association. He joined the IZA as a Research Fellow in 1999.