Wage inequality in workers' cooperatives and conventional firms.

• Author: Magne, Nathalie
• Position: Report

1. Introduction

   Explaining the increase of wage inequality has been a challenge for economists since the 1980s. At the level of the firm, there is no consensus to explain the deviations from marginal productivity remuneration. At a macro level, large inequalities are recognized as having a detrimental effect on growth and economic stability, specifically since the 2008 crisis (Dabla-Norris et al. 2015). A micro approach sheds light on the dynamics of wage inequality and cooperatives are a very good natural laboratory as democracy's effect on income distribution can be observed. Furthermore, the consequences of workers' participation on wage distribution can be studied with relation to effort incentive, worker selection and turn-over. There are many reasons to think that worker participation in decision making in firms should lead to lower wage inequality. Theoretically the median voter theory leads to the conclusion that, in cooperatives where workers vote democratically, there will be a redistribution of wealth whenever the median income is lower than the mean (Kremer 1997). Another point of view considers ex ante selection: agents who choose to work in a cooperative are likely to have a strong aversion to inequality. On the other hand, if cooperatives are operating side by side with conventional firms in a competitive market, they might not be able to have a significantly different wage structure in the long term. An empirical answer is thus required to the question of whether or not the wage structure actually differs between cooperatives and conventional firms, and more specifically whether inequality is lower in cooperatives. If it is, a second question will be raised: how much of the observed gap is due to the workers' characteristics and how much is due to a different remuneration of these characteristics?

   In empirical literature there is a consensus that inequalities are much lower in cooperatives. Pencavel (2001) proves this in the case of American plywood cooperatives and highlights the fact it can be partially explained by the small number of supervisors (3). Based on an extensive dataset of Uruguayan firms, Burdin (2016) shows strong evidence of redistribution in favor of low wage workers in cooperatives and of a higher exit rate for high-ability members. The paper offers precise measures of these two phenomena. The case of Mondragon cooperatives has also been investigated but shows a very different pattern from French cooperatives since statutory regulations exist regarding wage differentials (Dow 2003). The fact that there are no such rules in French cooperatives (4) leads to a large diversity of individual firms. It is therefore entirely relevant to measure the impact of workers' democratic participation on wage determiners. For Northern Italy, Bartlett et al. (1992) show a much lower wage differential in cooperatives since the ratio of managerial to unskilled manual workers' wages is 75% lower, mainly because of lower managerial salaries. More recently, Abramitzky (2008) explores the equality schemes and distribution patterns of Israeli Kibbutzim. He shows that the level of equality has diminished since the 1980s but the kibbutzim which have remained egalitarian are the richest. Finally, Clemente et al. (2012) measure lower inequality in Spanish cooperatives, with industry variations. With the exception of Burdin (2016), all these papers have databases concentrated on one industry or one region: Pencavel (2001) focuses on Northwest American plywood cooperatives and Bartlett et al. (1992) use a matched sample of 85 firms in Tuscany and Emilia-Romagna, all in light manufacturing with around 100 workers. While offering a unique field for systematic comparison since the chosen cooperatives and conventional firms develop in the same environment, these databases do not allow for variations in industry and region. The DADS (5) dataset allows us to take into account all French cooperatives which are distributed among all industries and French regions. It is also unprecedented in its size since it includes 23 million jobs, 45000 of which are in cooperatives. Panel data is available for years 2001 to 2012 for 1/12th of all French jobs. French SCOPs also present the double advantage of a long history and a recent dynamism: they have been numerous and active in a wide range of industries since the end of the 19th century and they have created an estimated 15,000 net jobs between 2000 and 2015. France is the third European country in terms of workers cooperatives after Spain and Italy.

   Some of the mentioned articles analyze the causes of reduced inequality (size of the firm, statutory rules, median voter theory or political convictions) while others focus on the consequences (brain drain, lower productivity). They do not go into detail about the distribution of wages according to categories of workers beyond the simple distinction between high-ability and low-ability workers. Furthermore, there is no measurement of the yield of workers' characteristics, with the notable exception of

   Clemente et al. (2012). Using the Oaxaca-Blinder method, the latter pinpoints workers' characteristics as the reason for their lower wages in cooperatives and finds similar returns for these characteristics in both types of firms. At the end of this brief review of the existing empirical literature, we can point out that wage inequality has not been well documented for French SCOPs (6) despite the rich and influential history of French workers' cooperatives, and in all other cases, the wage distribution was not analyzed in detail. This paper will attempt to answer the following: how different is the distribution of wages in French SCOPs compared to conventional firms (CFs) and which categories of workers benefit from it?

   Section 2 reviews the theoretical predictions and assesses their relevance in the context of French worker cooperatives. Section 3 presents the empirical strategy to compare levels of inequality and returns to workers' characteristics in both types of organizations. Section 4 describes the extensive dataset we use in our analysis. Section 5 displays the results and relates them to the hypotheses made in section 2. Section 6 presents concluding remarks.

2. Theoretical issues and institutional background

   2.1. Wage inequality theory

   Although SCOPs still account for a negligible proportion of French firms, they currently have the wind in their sails as they have been found more resistant to economic shocks (7) and are regarded as a popular alternative model of firm. (8) At the end of 2016, there were 2298 SCOPs in France employing 48750 workers. SCOPs are worker cooperatives characterized by a few important statutory rules:

1. Capitalization. Workers own at least 51% of the capital. Up to 49% can be owned by outside shareholders but it cannot be listed on the stock market, nor can the shares fluctuate from their nominal price.

2. One person = one vote. Members vote democratically in the general assembly (9). Not all workers are members of the cooperative and the proportion varies strongly between firms. Some SCOPs have clauses in their status making it compulsory for workers to become members within a few years, some strongly encourage it in an informal manner and others do not exert any pressure. On average, according to the CGSCOP (10), 69% of workers with at least 2 years seniority are members.

3. Profit distribution. The profits are shared in three parts: participation (at least 25%) is shared between all workers (including non-members) either on an equal basis or in proportion to wages or hours worked. Dividends (maximum 33%) are distributed to members in proportion to the owned shares. Reserves (minimum 16%) are reinvested in the company and constitute collectively owned capital that may never be paid to the members, even in the case of shutdown.

   These characteristics bring SCOPs close to what is referred to in the literature as labor-managed firms (LMF) or employee-owned firms since Ward (1958), although some institutional rules are not always well accounted for (particularly profit-sharing and integration of new members) as highlighted by Kamshad (1997). Theoretically, there are many good reasons to think wage inequality would be lower in such firms. The literature on the subject can be divided into two parts: the theory of labor-managed firms is founded on the median voter model whereas the non-profit literature relies mostly on the intrinsic motivation hypothesis.

   According to Kremer's median voter theory (1997), wages are compressed in LMF adopting the principle of one vote per worker, because whenever the median wage is below the mean a majority of workers votes for redistribution. This has two possible consequences. Firstly, minorities or non-members can be oppressed or arbitrarily expropriated. Secondly, workers whose abilities are above the mean are incited to flee to jobs where they have reasons to think they would be paid higher wages (11). This raises the question of the durability of such a significant difference in the wage structure on a competitive market. Kremer (1997) argues that mobility barriers exist in the form of a non-refundable investment all workers made in the cooperative before they had access to any information on productivity. Empirically, Burdin (2016) shows a higher turn-over for managers in Uruguayan labor-managed firms than in comparable conventional firms, without it calling into question the significantly different wage structure. In the case of SCOPs, the principle of one vote per member-worker applies, if not directly to decide on wages, at least to elect a manager who then decides on wages (12). There is an initial investment which can be seen as partially non-refundable since the legal status of SCOPs proscribes capital gains workers could benefit from if they invested their capital in CFs' shares. We can therefore expect a certain level of redistribution...