Codetermination and Productivity The way works councils affect firm performance

Employee participation and establishment-level codetermination via works councils are central elements of the German system of industrial relations. The existence of a works council is widely observed to be positively correlated with productivity. However, much less is known about the transmission channels that works councils use to affect productivity. In this paper two hypotheses have been derived from existing theory and tested empirically. First, works councils influence the efficiency of organizational changes positively and second, they increase the returns on investments in firm-specific human capital. Both hypotheses are tested using production function estimates of manufacturing industries based on data from the IAB Establishment Panel. Panel estimators are used to deal with the potential biases that may arise due to unobserved fixed firm-specific effects and the simultaneity of the input decision. In contrast to former studies with German data I efficiently control for capital input. After taking organizational change measures and the intensity of employersupported training into account I find no direct productivity effect of works councils. However, I find that employer-supported training increases productivity only in firms with a works council, providing evidence for the second hypothesis. This supports theories that explain productivity differences with the increased employment protection works councils enforce. The results do not support the first hypothesis and therefore stand in contrast to the strands of theoretical literature that explain productivity differences via the communication improvements between management and workforce, i.e. the collective voice approach.