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Codetermination guarantees worker representation in the management of a firm. It is commonly found in coordinated market economies such as Germany. Liberal market economies, such as the United States, typically do not legislate mandatory worker representation in firms.
Germany introduced codetermination in 1951, establishing employee participation at two levels of corporate governance: the firm level, with works councils, and a higher level, with employee representatives on the supervisory board. Employee representation is most extensive in the coal, iron, and steel industries, where near parity is legislated, nominally giving equal representation to employees and employers. In 1976 the German government extended codetermination to other industries, but without full parity (European Foundation 2005c). Under these rules, worker representation is extensive but not uniform across issue areas. Most significantly, workers have a voice on issues that concern health and safety at work, personnel matters, training, and renumeration (European Foundation 2005d).
In Austria codetermination allows employees to influence firm decisions that affect their employment conditions, but it is limited to disciplinary procedures and some renumeration matters where firms must receive the works council’s approval before making changes (European Foundation 2005a). Codetermination reinforces norms of trust between firms and employees, yielding an environment of relatively peaceful industrial relations.
Sweden established rules in 1976 that promoted employee participation in firm decision making, but the laws pertain only to firms that have collective bargaining agreements with their unions (European Foundation 2005e). Similarly, the 1978 Co-operation Act in Finland regulates industrial relations, allowing employees to participate in decision making on limited matters, including training and worker welfare (European Foundation 2005b). Although the policies in Sweden and Finland are often called codetermination, the policies are neither as extensive nor as broadly applicable as in Germany. Thus, the institution of codetermination varies across countries, industries, and issue areas.
As the barriers to trade and labor mobility are lowered in the European Union, analyzing the costs and benefits of codetermination is critical. In the case of full parity, as in the coal and steel industries in Germany, board members perceive slower decision making due to worker inclusion as a significant disadvantage (Hopt 1984). This cost must be balanced against the advantages of trust and information sharing. In a more recent survey in Sweden, for instance, a majority of directors had a “rather positive” or “very positive” view of worker representation on employee boards. And in fact, the Swedish survey demonstrated that codetermination actually increased efficiency (Levinson 2001, pp. 265–266).
Further, increased worker representation should result in better working conditions for employees and for greater industrial peace; otherwise, either workers or employers would oppose the policy. Analysis of hourly earnings confirms that codetermination does increase hourly earnings (Svejnar 1981, p. 194). Codetermination also seems to have a positive effect on cooperation between firms and their employees (Levinson 2001, p. 266).
Nevertheless, codetermination may not be suitable for every country or firm. Legislating codetermination in multinational corporations is complicated by legal and economic factors, as the Netherlands implicitly acknowledges by granting multinational corporations exemptions from codetermination (Hopt 1984, p. 1363). Also, codetermination is a characteristic of coordinated market economies, where coordination by nonmarket mechanisms is critical to economic success (Hall and Soskice 2001). Mandating codetermination in liberal market economies may be counterproductive because the market itself provides the critical source of coordination, providing comparative advantages.
- European Foundation for the Improvement of Living and Working Conditions. 2005a. EMIRE: Austria— Co-Determination. http://www.eurofound.europa.eu/emire/AUSTRIA/ANCHOR-MITBESTIMMUNG-AT.html.
- European Foundation for the Improvement of Living and Working Conditions. 2005b. EMIRE: Finland—CoDetermination Agreement. http://www.eurofound.europa.eu/emire/FINLAND/ANCHOR-MY-Ouml-T-Auml-M-Auml—Auml-R-Auml—Auml-MISSOPIMUSMEDBEST-Auml-MMANDEAVTAL-FI.html.
- European Foundation for the Improvement of Living and Working Conditions. 2005c. EMIRE: Germany— Co-Determination. http://www.eurofound.europa.eu/emire/GERMANY/ CODETERMINATION-DE.html.
- European Foundation for the Improvement of Living and Working Conditions. 2005d. EMIRE: Germany— Co-Determination Rights of the Works Council. http://www.eurofound.europa.eu/emire/GERMANY/CODE TERMINATIONRIGHTSOFTHEWORKSCOUNCIL-DE.html.
- European Foundation for the Improvement of Living and Working Conditions. 2005e. EMIRE: Sweden— Co-Determination. http://www.eurofound.europa.eu/emire/SWEDEN/ ANCHOR-MEDBEST-Auml-MMANDELAGEN-SE.html.
- Hall, Peter A., and David Soskice. 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. New York: Oxford University Press.
- Hopt, Klaus J. 1984. New Ways in Corporate Governance: European Experiments with Labor Representation on Corporate Boards. Michigan Law Review 82 (April–May): 1338–1363.
- Levinson, Klas. 2001. Employee Representatives in Company Boards in Sweden. Industrial Relations Journal 32 (September): 264–274.
- Svejnar, Jan. 1981. Relative Wage Effects of Unions, Dictatorship, and Codetermination: Econometric Evidence from Germany. Review of Economics and Statistics 63 (May): 188–197.
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