Co‐determination and Personnel Turnover: The German Experience

Abstract

ABSTRACT: It has often been argued, that within the German system of co‐determination the works council has an unparalleled participative role, which goes well beyond any voice function of trade unions in the Anglo Saxon tradition. Nevertheless, there is surprisingly little empirical evidence, whether and to what extent works councils influence employers’dismissal and employees’quit decisions. Analyzing a representative sample of private sector firms that have to obey the Dismissal Protection Act of 1969 and the Works Constitution Act of 1972, the paper finds that firms with a works council have an annual dismissal rate which is 1.6 percentage points lower than the one experienced by firms wthout a plant‐level interest representation. At the same time, firms with a works council have a quit rate which is 1.5 percentage points lower than the one in firms without such interest representation. Union density, on the other hand, has no statistically significant influence on either the dismissal or the quit rate. Apparently, it is the works councils that in both cases act as a collective “voice institution”, serving as a direct channel of communication between workers and management. Although it is difficult to reach a safe conclusion about the net economic impact of works councils on the employment behavior of firms, the findings lend some support to the following assumption: since hiring and training costs are usually higher than firing costs, firms on average benefit from the presence of a works council with regard to their user costs of labor: the “savings” due to avoided voluntary quits apparently more than compensate for the additional spendings for severance payments and the costs of co‐determination.