Works Councils and Heterogeneous Firms

Theoretical analyses of the effects of works councils show ambiguous results. Therefore an empirical investigation of the issue is inevitable. The results so far are mixed, frequently a positive effect on productivity, but a negative one on profits is found. The problem of both theoretical and empirical studies is the assumption of firm homogeneity. To close this gap, we take into account firm heterogeneity proxied by the percentage of highly qualified employees in the workforce. The theoretical result that the positive productivity effect is more pronounced in firms with well-defined majorities is confirmed in the empirical part of the paper. The results on profitability are less favourable for works councils: in those firms where the productivity effect is significant, the profitability effect is negative, except for firms with a very high percentage of highly qualified employees. Turning to the effect of collective agreements, they seem to mitigate the problem of reduced profitability in firms with no clear majority in the structure of qualifications.