Gender, worker representation and the profitability of firms in Germany.

• Author: Jirjahn, Uwe
• Position: Report

1. Introduction

   Education and labor force participation of women have been increasing in Germany (Legewie and DiPrete 2009, Eichhorst and Thode 2010). However, there is still a substantial unexplained gender wage gap. While the gap varies from study to study, there appears to be little doubt that it exists. For example, Holst and Busch (2008) estimate for the year 2006 an unexplained gender pay gap of 17 percent among full-time employees. (2) Recent research shows that the gap differs between employers. This fits Groshen's (1991) general hypothesis that employers often have discretion in setting wages and, hence, pursue their own remuneration policy. Importantly, there is evidence that establishment-level codetermination plays a role. The unexplained gender pay gap is substantially smaller in establishments where a works council is present (Gartner and Stephan 2004, Addison et al. 2010, Heinze and Wolf 2010). This finding fits the notion that works councils reduce intra-establishment wage inequality to increase solidarity within the workforce and, hence, to strengthen workers' bargaining power.

   The question at issue is whether the reduction in the gender pay gap can be seen as a decrease in wage discrimination or whether it can be viewed as a decrease in a wage differential that reflects productivity differences. Based on data from manufacturing establishments, this study makes a first attempt to answer this question by examining the determinants of profitability. The basic idea is that the two points of view have different implications for the link between the share of female employees and the establishment's profitability.

   If the unexplained gender wage gap solely reflects differences in unobserved productivity characteristics of men and women, the proportion of female employees should have no influence on profitability. This should hold specifically for establishments without works councils as those establishments face less restriction in downward adjusting women's wages to women's lower productivity. By contrast, there should be a negative relationship between the share of female employees and profitability in establishments with works councils. Reducing a productivity-related gender pay gap means that works councils increase women's wage beyond women's productivity. Hence, if a codetermined establishment employs a high share of women, it has a high share of employees who receive wages above their productivity.

   Yet, if the unexplained gender pay gap also reflects discrimination, women receive wages below their productivity. Establishments employing a high share of female employees should earn higher profits as they have a high share of workers who are paid below their productivity. This should hold particularly for establishments where no works council is present. Those establishments are subject to less regulation and, hence, have more opportunities for wage discrimination. By contrast, opportunities for discrimination are more limited in establishments with works councils. To the extent works councils reduce the discriminatory gender pay gap, the labor cost of women will rise. Hence, we should observe that the positive link between the proportion of female employees and profitability is attenuated in codetermined establishments.

   The empirical results of this study provide support for view that works councils reduce wage discrimination. The estimates show a positive link between the share of women and profitability in establishments without a works council but no significant link in establishments with a works council. Moreover, the estimates confirm that works councils themselves are positively associated with profitability. This finding conforms to theoretical analyses suggesting that works councils contribute to increased performance by creating trustful industrial relations. Altogether the empirical results of our study fit the notion that establishment-level codetermination decreases profits that are due to discrimination while it increases profits that are due to cooperative employer employee relations. (3) Reducing discriminatory wage inequality is likely to contribute to increased cohesiveness among workers. This in turn strengthens the power of a works council to build trustful and cooperative industrial relations within the establishment.

   Finally, the results show that the method of pay plays a role in the association between the share women and the profitability of the establishment. The association is attenuated if the establishment uses piece rates to provide incentives for workers. This result complements evidence of a smaller gender pay gap for workers receiving piece rates (Jirjahn and Stephan 2004). Piece rates are based on a relatively objective measurement of worker performance. As workers are rewarded for the units of produced output, superiors have little discretion in performance measurement. Thus, piece rates provide less scope for favoritism and discrimination.

   The rest of the article is organized as follows. Section 2 provides the background discussion. Section 3 describes the data and the variables. Section 4 presents the results. Section 5 concludes.

2. 2. Background Discussion

   2.1 Works Councils in Germany

   German industrial relations are characterized by a dual structure of employee representation with both works councils and unions (Hubler and Jirjahn 2003). While unions negotiate over wage rates and general aspects of employment contracts on a broad industrial level, works councils provide a highly developed mechanism for establishment-level participation. (4) Their rights are defined in the Works Constitution Act (WCA), which was introduced in 1952 and amended in 1972, 1989 and 2001. Workers in any establishment with five or more employees may elect council members but the creation of the council depends on the initiative of the establishment's employees. Hence, councils are not present in all eligible establishments. Works councils negotiate over a bundle of interrelated establishment policies. On some issues they have the right to information and consultation, on others a veto power over management initiatives and on still others the right to coequal participation in the design and implementation of policy. Works councils are institutionalized bodies of worker representation that have functions that are distinct from those of unions. They do not have the right to strike. If council and management fail to reach an agreement, they may appeal to an internal arbitration board or to the labor court. Moreover, the WCA does not allow wage negotiations. The aim is to restrict distributional conflicts on the establishment level. Rather works councils are designed to increase joint establishment surplus. Council representatives are required by law to cooperate with management "in a spirit of mutual trust ... for the good of the employees and of the establishment."

   There are two major explanations as to why works councils may play the intended role in building cooperative and trustful industrial relations within establishments. First, works councils as a collective voice institution can potentially aggregate worker preferences and solve free-rider problems in the case of workplace public goods (Freeman 1976). They can communicate aggregated worker preferences to management, helping to optimize the provision of workplace public goods and to establish an effective personnel management that in turn motivates workers. Second, works councils can foster cooperation and motivation by solving commitment problems (Smith 1991, Freeman and Lazear 1995, Kaufman and Levine 2000, Hogan 2001, Osterloh and Frey 2006). Employees may refuse cooperation when an employer cannot credibly commit to take into account their interests. Providing works councils with codetermination rights is one way to protect the interests of the workforce and to cooperatively realize mutual gains for the employees and the owners of the establishment. Indeed, recent empirical studies confirm that works councils can increase productivity and reduce personnel turnover (Addison et al. 2001, Frick and Moeller 2003, Smith 2006, Jirjahn et al. 2011). (5)

   However, there is also evidence that works councils have an influence on the level and the structure of wages. Though wage negotiations between council and management are not authorized by law, the presence of a works council is associated with a higher average wage level per employee (Addison et al. 2001) and a reduced intra-establishment wage differential between skilled and unskilled workers (Hubler and Meyer 2001, Jirjahn and Kraft 2010). On the one hand, this may reflect rent-seeking activities. The council may use its codetermination rights on social or personnel matters to obtain employer concessions on issues where it has no legal powers. If the employer and the works council fail to reach an agreement in informal wage negotiations, the council can threaten to be uncooperative in areas where its consent is necessary. On the other hand, the available evidence does not support the view that rent seeking plays the dominant role in the functioning of establishment-level codetermination (Frick 2008). Recent research suggests that works councils do not inhibit investment (Hubler 2003, Addison et al. 2007). Quite the contrary, recent studies provide evidence that works councils are associated with increased innovativeness (Askildsen et al. 2006, Jirjahn and Kraft 2011) and higher profitability (Mueller 2011). (6) Moreover, findings by Jirjahn and Kraft (2007) indicate that a reduction in wage inequality is important for the performance-enhancing role of works councils. The positive effect of works councils on productivity appears to be stronger if the intra-establishment wage differential between skilled and unskilled workers is smaller. This fits the notion that works council reduce wage inequality to increase cohesiveness and solidarity among workers. This in...