Labor Representation in Governance as an Insurance Mechanism

We investigate how Germany’s mandated 50% labor representation on supervisory boards affects layoffs and wages during adverse industry shocks. We hypothesize that parity-codetermination helps the implementation of implicit contracts that insure employees against adverse shocks. We estimate difference-in-differences in employment and wages using panel data at the establishment level. The results show white-collar and skilled blue-collar employees of firms with parity-codetermination are protected against layoffs during shock periods and pay an insurance premium of about 3% in the form of lower wages. Unskilled blue-collar workers lack real representation on the board, and they are not protected against shocks. The effects of insuring employees manifest in higher operating leverage and lower average profitability. We conclude that mandated parity codetermination implements an insurance mechanism, but also prevents employers from extracting adequate wage concessions from workers in return. This Draft: December, 2013 JEL classifications: G14, G34, G38