Keywords

JEL Classifications

Market economies are called ‘capitalist’ because in such economies most production is carried out in organizations owned by those who supply the firms’ financial capital. A firm is ‘owned’ by its capital investors because, first, the capital investors claim the firm’s net receipts or profits and, second, they have the authority to direct and manage (often indirectly) the firm’s activities.

Yet in all market economies some production takes place in firms where these two dimensions of ownership are embodied in those who supply labour rather than capital. In this instance, workers enjoy as incomes the firm’s net receipts and the workers hire individuals to supervise and organize production. Capital may be obtained from the workers’ savings or from loans from financial intermediaries. Examples of worker cooperatives include the plywood companies in the Pacific Northwest of the United States, the kibbutzim in Israel, and the Mondragon group in the Basque country of Spain.

Many enterprises fall between these two limiting cases. These other firms are characterized by the owners either sharing net revenues with others – ‘profit-sharing’ – or sharing in the activities of management – ‘worker participation’. (For recent research on the general issues, see the essays in Blair and Roe 1999, and Ichniowski et al. 2000.)

Profit-sharing occurs when those who have the right to consume all the firm’s profits distribute a portion of them to others within the organization. Because most firms are owned by those who supply capital, profit-sharing usually occurs when some portion of profits is distributed among the rank-and-file workers.

With explicit profit-sharing, a clear formula is established linking profits and the pay of individuals. Profit-sharing is implicit when workers in firms that habitually enjoy higher profits are paid higher wages. Profit-sharing may take the form of deferred income, as when a portion of net receipts is placed in retirement accounts so that the firm’s employees hold part of the assets of the firm in which they work.

A principal goal of these various profit-sharing arrangements is to affect incentives: by linking workers’ compensation to the firm’s success in making profits, the workers’ interests are aligned more closely with the capital owners’. However, some economists reason that, when the firm’s net earnings are divided among a large number of people and one individual’s effort contributes little to total output, the incentive for a single individual to apply effort is meagre. What empirical evidence there is suggests that, with profit-sharing, workers monitor one another so that any tendency to shirk is checked.

When workers’ pay is linked to profits, some automatic flexibility is imparted to a firm’s payrolls so the effects of adverse shocks are communicated immediately and mechanically to the firm’s costs. Some have suggested that, if profit-sharing payment schemes were widespread, recessions would be characterized by less unemployment. Kruse (1993) reviews profit-sharing.

‘Worker participation’ is a term embracing various arrangements by which workers are actively involved in the management of the enterprise where they work. These arrangements may include safety and health committees or panels to deal with worker grievances, or they may be more profound arrangements when workers are actively engaged in key management activities such as the organization of work and production. In Europe, works councils or workers’ committees are empowered to be consulted and, sometimes, to share in determining any changes in the organization of production (also known as co-determination).

One argument in favour of worker participation is that participation begets productivity. Modern ‘flexible’ or ‘lean’ production techniques entail greater employee involvement in shop-floor decisions, greater teamwork, information-sharing between management and rank-and-file employees, and reduced task specialization. An extensive research literature quantifies the effect of greater worker participation on productivity. A general finding is that there are positive, though small, productivity benefits accompanying worker participation.

A second argument for worker participation is that it is the extension to the workplace of democratic governance in the political arena. In much the same way as citizens in political democracies have an important voice in choosing those who determine the provision of public goods in society so an enterprise’s workers should have a voice in shaping their work environment when public goods are also prevalent. Worker participation is the application of the democratic principle to the workplace.

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