Are the firm owners really worse off with a works council

Abstract

As they are employee associations, it is typically presumed that works councils redistribute economic rents from firm owners to workers. And indeed, empirical literature suggests that works councils reduce profits although, at the same time, they increase productivity. Studies on the profitability effect of works councils, however, mainly use self-reported subjective profit evaluations of managers as the dependent variable. I additionally use objective measures to check the validity of these results. While negative effects are reproduced with the subjective measure, non-negative effects for the objective measures contradict previous results. With the objective measures, the works council effect on profit further increases if attempts are made to control for self-selection, and it is generally positive if the establishment is covered by a collective bargaining agreement. Further results indicate that the subjective profit measure is a poor measure of actual profits and that it is hardly appropriate as a dependent variable in a profit regression.

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