Media Briefings

WORKPLACE DEMOCRACY DELIVERS GREATER EQUALITY BUT NOT FOR FREE

  • Published Date: July 2016

WORKPLACE DEMOCRACY DELIVERS GREATER EQUALITY BUT NOT FOR FREE

Worker-managed firms have a more egalitarian compensation structure than conventional firms, but their most productive members are more likely to leave the organisation than other members. These are the central findings of research by Gabriel Burdin, published in the August 2016 issue of the Economic Journal.

Analysing individual and matched organisation-individual administrative data from Uruguay for the period 1997-2009 and relying on workers’ position in the intra-firm wage distribution as a measure of their ability, the study finds that:

• Workers employed in a worker-managed firm earn a small wage premium (3%) compared with similar workers employed in the conventional sector.

• This positive wage gap declines significantly with increasing pay and becomes negative for top earners: low-wage workers disproportionately benefit from workplace democracy.

• The separation risk of high-productivity members is more than three times higher than that of low-productivity members. Those who switch to the capitalist sector experience a 7% gain in their wages on leaving.

• The severity of the ‘brain drain’ is affected by the intensity of redistribution and by the opportunities offered in the conventional sector: greater internal redistribution and better labour market conditions increase the brain drain.

Our modern economic landscape is dominated by firms in which those who provide capital have ultimate control over managerial decisions. But a tiny fraction of firms in most developed and developing countries are managed by their workers.

Worker-managed firms, also known as worker cooperatives, have existed alongside investor-controlled firms in most Western economies since the Industrial Revolution. These firms are democratic in the sense that members have equal influence on decisions regardless of their capital contribution to the firm.

From an economic point of view, the paucity of this type of organisations remains a puzzle, particularly in industries with low capital requirements. The new findings are broadly consistent with the hypothesis that workplace democracy is associated with substantial redistribution at the expense of the most productive workers.

It is beyond the scope of the study to analyse the relationship between pay compression and organisational performance in worker-managed firms. But the documented brain drain effect suggests a plausible mechanism to account for a potential negative relationship between pay compression and performance.

Nevertheless, previous research has shown that worker-managed firms perform at least as well as conventional firms in terms of productivity and survival. While organisations may also benefit from pay compression, the research identifies an often overlooked unintended consequence of egalitarian policies in a context in which individuals endowed with attractive exit options can ‘vote with their feet’.

ENDS


Notes for editors: ‘Equality Under Threat by the Talented: Evidence from Worker-managed Firms’ by Gabriel Burdín is published in the August 2016 issue of the Economic Journal.

Gabriel Burdín is Assistant Professor at FCEA, Universidad de la República, and IZA Research Fellow. He is currently a Marie Curie Research Fellow at Leeds University Business School.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh); or Gabriel Burdín via email: g.burdin@leeds.ac.uk (Twitter: @GabrielBurdin).