The ‘strategic discrimination’ of works councilors in Germany: new evidence of the demise of a model? Clément Brébion (PSE) February 8th, 2019 1
What are works councils? • Two main types of elected actors can represent the labour force at the shop floor: – Union delegates – Works councilors • Union delegates: – Take part in collective bargaining – Act on behalf of a union which dimensions and preferences exceed the scope of the firm • Works councils: – Scope of interests is restricted to the firm environment. • Different entitlements – Freeman and Lazear (1995, p. 29), “in contrast to plant -level unions, councils cannot call strikes nor negotiate wages […]. Their function, often specified in legislation, is to foster labor and management cooperation with the goal of increasing the size of the enterprise ‘pie’” 2
Motivation 1 – In the economic literature, little is known on the workers ’ representatives taking part in collective negotiations • The theoretical economic literature on collective organisations – Basic classical /neoclassical models under perfect competition, no collective organisation – Introduction of unions in the main neoclassical models as ‘rent -seaking ’ (‘rent - distributing’) organisations – mostly per the model of a monopoly able to set wages (Dunlop, 1944) – Freeman (1976) et Pencavel (1977) emphasize that unions are also ‘rent - generating’ organisations – able to reduce some market failures (informational asymmetries, principal- agent problems, free-riding problems) 3
Motivation 1 – In the economic literature, little is known on the workers ’ representatives taking part in collective negotiations • The theoretical economic literature on collective organisations fostered … • … a large stream of empirical research estimating the impact of unions on covered firms and their average worker – In terms of wages, employment, productivity… (Lewis, 1986; Blanchflower and Bryson, 2004; Mayneris, Poncet and Zhang , 2015) 4
Motivation 1 – In the economic literature, little is known on the workers ’ representatives taking part in collective negotiations • The theoretical economic literature on collective organisations fostered … • … a large stream of empirical research estimating the impact of unions on covered firms and their average worker • … research on works councils – Legal entitlements of works councils arelikely to limit their ‘rent -seaking ’ behaviours and to foster their ability to generate rents. – Freeman and Lazear (1995, p. 29), “in contrast to plant -level unions, councils cannot call strikes nor negotiate wages […]. Their function, often specified in legislation, is to foster labor and management cooperation with the goal of increasing the size of the enterprise ‘pie’” – Empirical research on councils’ impact on firm performance and wage ( FitzRoy and Kraft 1985, 1987, 1990) 5
Motivation 1 – In the economic literature, little is known on the workers ’ representatives taking part in collective negotiations • The literature on collective organisations has traditionally been limited to the estimation of their impacts on covered firms and workers. • But very little is known on the actors of the negotiations. – Stormer (2010) “ The main body of research on work councils has been conducted on a collective institutional level, neglecting work council members at an individual level .” – Breda (2014) : “To my knowledge, there is no quantitative economic paper in French or English dealing with the role of union leaders, either at the level of the firm or at the national level” 6
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) Figure 1 - Yearly average, bottom and top deciles of the 'predominant level of centralisation of wage bargaining' in the OECD 5 4 3 2 1 0 1975 1980 1985 1990 1995 2000 2005 2010 Note: The index goes from 1 (fully decentralized) to 5 (fully centralized). The shaded area displays the range between the first bottom and top deciles. Only countries with information over the full period are used. Source: ICTWSS database (Visser, 2015) 7
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) Figure 2 - Yearly average, bottom and top deciles of the 'actual level of centralisation of wage bargaining' in the OECD 5 4 3 2 1 0 1975 1980 1985 1990 1995 2000 2005 2010 Note: The index goes from 1 (fully decentralized) to 5.75 (fully centralized). It is calulated as: LEVEL - (fAEB+OCG)/4(=max value) + (Art+DR-1)/5(=max value), where LEVEL= the predominant level at which wage bargaining takes place, fAEB = the frequency or scope of additional enterprise bargaining, Art= the formality of additional enterprise bargaining and its control by union bodies, OCG = General Opening clauses in collective agreement,DR= Derogations. The shaded area displays the range between the first bottom and top deciles. Only countries with information over the full period are used. Source: ICTWSS database (Visser, 2015) 8
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) • The rising strategic importance of shop-floor representatives for the firm – In particular, works councils have to engage in bargaining over an increasing range of issues Likely to deter the quality of employer-employee relations Employers are likely to pay increasing attention to the composition of works councils… … especially in the absence of sectoral agreement. 9
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) • The rising strategic importance of shop-floor representatives for the firm • An increased risk of ‘strategic discrimination’ (Breda, 2014; Bourdieu and Breda, 2016), especially against works councilors – Focus on the main workers’ representatives taking part in the collective negotiation at the firm level in France : the ‘ délégués syndicaux ’. • The delegates play two bargaining games with their employer – “Theoretically, the interaction between the employer and the ‘ délégués syndicaux ’ can lead to two Nash equilibria ” (Breda, 2014) • The non-cooperative equilibrium • The cooperative equilibrium A risk of ‘strategic discrimination : Bully the most radical representatives, ‘buy’ the most cooperative ones 10
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) • The rising strategic importance of shop-floor representatives for the firm • An increased risk of ‘strategic discrimination’ (Breda, 2014; Bourdieu and Breda, 2016), especially against works councilors - Main result : On average, union delegates suffer a wage penalty 10% larger than the other union members (whose penalty in null in Breda, 2014 and of 4-5% in Breda and Bourdieu, 2016). Several elements suggest that the most vehement representatives would suffer a stronger penalty 11
Motivation 2 – Focusing on negotiations at the firm level – the increasing strategic importance of WoCo for the firms • A context of generalized decentralization of the bargaining process (Baccaro et Howell, 2011) • The rising strategic importance of shop-floor representatives for the firm • An increased risk of ‘strategic discrimination’ (Breda, 2014; Bourdieu and Breda, 2016), especially against works councilors • … which is likely to depend on the institutional rules 12
Motivation 3 – A risk of ‘ strategic discrimination’ theoretically limited in Germany • It can be expected that the welfare gains induced by works councils are maximized in Germany – Works councils benefit from the largest ‘co - determination rights’ in the Western world. – CBAs on most strategic issues are traditionally relegated to the branch level 13
Motivation 3 – A risk of ‘ strategic discrimination’ theoretically limited in Germany • Good quality of employer-employees relations in Germany Figure 3 - Cooperation in labor-employer relations in the OECD countries Averaged over 2007-2017 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 France Korea, Rep. Italy Greece Turkey Spain Slovenia Poland Slovak Republic Portugal Hungary Belgium Latvia Mexico Australia Chile Czech Republic Israel United States Estonia Canada Germany United Kingdom Finland Ireland New Zealand Luxembourg Iceland Netherlands Sweden Japan Austria Norway Denmark Switzerland Source : World Economic Forum - The Global Competitiveness Index Historical Dataset Note : Self- declared estimation based on the question : “In your country, how do you characterize labor-employer relations ?” [1 = generally confrontational; 7 = generally cooperative] 14
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