Since the 1960s, income inequality has increased and the labor share of income has decreased at the same time as unionization rates have fallen, prompting policymakers and worker advocates to think of new ways to increase the power of employees. Codetermination, a European model of worker power, could offer a potential remedy to these trends. Codetermination is the practice of involving workers in a company’s management process. Typically, this takes the form of nonmanagerial workers being allowed to vote for representatives to a company’s board of directors, which supervises the actions of the organization, or consulting workers over decisions like scheduling and pay. Codetermination differs from organized labor, where workers negotiate with employers through unions or other third parties to achieve better wages or working conditions.
There are reasons to think that codetermination could bring benefits to workers, though much of the existing research offers little empirical evidence and relies on older data. This study suggests that codetermination could help alleviate the power imbalance between employers and employees by acting as a buffer against low wages and unfair employer practices. If workers are involved in the governance of a company, they may have a greater role in company decision-making and ensure that the company invests in its employees, which in turn could foster human capital and greater productivity. The theory of codetermination proposes that when workers are involved in management processes, they may be more inclined to believe company promises of promotions or raises if they work hard or learn firm-relevant skills.
By and large, American companies have not voluntarily incorporated codetermination into their organizational structures. In part, this is because it could make it harder for executives to remove employee supervisors and influence a company’s management structure. In countries where the practice is more common, governments have mandated such laws, offering a potential lesson for policymakers in the United States.
This study by researchers at MIT and University of California, Berkeley looks at two historical examples that offer what they call a “natural experiment” to examine the impact of codetermination: Finland’s mandate of codetermination in 1990 and a 1994 decision by Germany to end a codetermination requirement for newly founded stock corporations with fewer than 500 employees.
Key findings:
- Codetermination usually comes in one of two forms: board-level or shop-floor representation. In board-level representation, workers are elected to a given number of seats—usually 20 to 40 percent—on a company’s board and are afforded the same rights as other board members. In shop-floor representation, workers elect representatives to be involved in the day-to-day management of a company, but the level of authority they have varies greatly. A shop-floor codetermination structure requires a company to consult with worker representatives before making a decision that would affect workers, such as their scheduling or pay.
- Codetermination, in both its forms, has somewhere between a negligible to slightly positive effect on the wages of workers. A similar study found the same in Norway.
- Some evidence suggests that board-level representation could decrease worker exits from a company even if their wages are cut. The study finds that this type of codetermination prompted a 2 percent decrease in employees going from working to unemployed. The researchers suggest that when workers are involved in the decision-making process, they will more readily recognize when a crisis genuinely necessitates a wage cut. In these cases, employees are more likely to accept cuts to their wages and hours, so jobs across the board are saved.
- Both board-level and shop-floor representation increase job satisfaction. This is likely because codetermination grants workers some limited control, mostly over aspects of their direct work environment. The effects of codetermination on sick leave is less clear.
- Board-level and shop-floor representation has almost no effect on the productivity of a company, revenue, or profitability—all while giving greater power to workers’ interests. Separate studies have even found a positive association between shop-floor groups representing workers and the overall productivity of a company.
Policy and practice implications
Based on this study’s findings, WorkRise identifies the following implications for policy and practice:
- The research suggests that the European model of codetermination will not solve all the problems of poor economic mobility for low-wage workers. Board-level and shop-floor variations of codetermination would, however, give workers more control over their working conditions and more flexibility to decide trade-offs in their working hours and pay where trade-offs are necessary. Codetermination arrangements tend to have a positive effect on both wages for workers and profit for the company.
- Laws supporting codetermination have been proposed by progressive lawmakers but have failed to gain bipartisan support. Proposed laws like the Accountable Capitalism Act, introduced in 2018, and the Reward Work Act, introduced in 2019, would require companies to reserve 40 percent and 33 percent of board seats to workers, respectively. Given the relatively low unionization rate in the United States compared to European countries, it is hard to know how successfully codetermination arrangements might be implemented. Workers may benefit more from codetermination than European workers in the absence of other organized labor protections. Codetermination is one form of worker power that could make up the worker-power deficit that unions have slowly lost.