In new research, Matthias Breuer, Wei Cai, Anthony Le, and Felix Vetter find that gender minority representation on German works councils helps to improve worker welfare and productivity.

Shareholder primacy is the dominant form of capitalism around the world. Amid rising wealth inequality, persistent gender and racial inequities, deteriorating climate conditions, and growing social tensions, however, calls for a more inclusive form of capitalism grow louder. A central pillar of inclusive capitalism is the shared governance of corporations. Prominent examples of shared governance include labor representation in corporate decision-making bodies and minority quotas for these bodies. These measures aim to ensure the inclusion of diverse perspectives in the governance of corporations.

The effectiveness of these measures, however, remains the subject of controversial debates. Skeptics of labor representation caution that abandoning shareholder primacy could lead to unclear responsibilities, hold-up issues, and less efficient decision-making. Likewise, skeptics of quotas express concerns that quotas could hamper the meritocratic selection of decision makers and, ultimately, worsen decision-making.

We examine the joint promise of labor representation and minority quotas in the context of German works councils. The councils are a powerful form of shared corporate governance. Since 2001, elections to the works councils have been subject to a gender quota. The quota aims to ensure that the minority gender in the workforce is also represented among the delegates (roughly in proportion to its share in the workforce). In this setting, we find that required minority (gender) representation increases the share of the minority gender on the works council, elevates the activity level of works councils, improves workers’ satisfaction, lowers worker turnover, and even improves businesses’ investment and worker productivity.

Works Council Rights, Responsibilities and Gender Quota

Works councils are a popular form of shared governance in Europe. In recent years, this form of shared governance has even gained attention in the United States. In Germany, works councils have a long tradition and ample rights, including information, consultation, and co-determination rights. Works councils, for example, have co-determination rights over work conditions and various social, environmental, and personnel matters. By contrast, works councils’ powers surrounding worker wages are limited. Wage disputes are outsourced to sector-level unions that negotiate wages for all employees in a sector.

The Works Constitution Act governs the setup, size, and election procedure of works councils in Germany. According to the act, workers can vote to establish works councils in establishments with five or more workers. The size of the councils depends on the establishment’s size. Establishments with 5-20 workers, for example, have a one-member works council, whereas establishments with 21-50 workers have a three-member works council, and establishments with 51-100 workers have a five-member council (and so on). The council members hail from the shop-floor workers and are elected, every four years, by their fellow non-managerial workers. In 2001, an amendment to the Works Constitution Act introduced a gender quota for works councils. The quota reserves seats in the works council for the minority gender (whether men or women) in proportion to the share of the minority gender in the workforce. Following the D’Hondt method, for example, one seat is reserved for the minority gender in a three-member council when the minority gender makes up at least 25% of the workforce.

The legal cutoffs governing the works councils’ size and minority seat assignment provide rich variation in the required minority representation on works councils (Figure 1). We exploit this discontinuous variation in our empirical analysis to home in on the law-induced variation in the makeup of works councils.

FIGURE 1: Required Minority Representation According to D’Hondt Method

Note: This figure illustrates the variation in the required minority representation across works councils of different sizes. The horizontal axis shows the minority share in the workforce, while the vertical axis shows the minority share on the works council. The solid black line is the 45-degree line, which corresponds to equal representation of minorities in the workforce and works council. The solid dark blue line illustrates the required minority share on a three-member works council as a function of the minority share in the workforce. The dashed light blue line illustrates the required minority share on a five-member works council as a function of the minority share in the workforce. The dashed black line illustrates the required minority share on a seven-member works council as a function of the minority share in the workforce.

Impact on Works Councils, Workers, and Employers

Using data from the Institute of Economic and Social Research’s (WSI) works-council surveys, we find that required minority representation is effective in ensuring a minimum level of representation of the minority gender in the works councils. It is especially effective in averting minority underrepresentation in establishments with a female-minority workforce. Our findings suggest that, in the absence of the quota, women may be underrepresented on the councils by as much as 20%.

When minority representation is ensured by the quota, we observe that works councils appear to work harder.  They concern themselves with more issues and obtain more trainings (e.g., from union-run training centers) on how to best advocate for their fellow workers.

With the help of granular data from the IAB’s Linked Personnel Panel (LPP), we then explore whether the works councils’ increased effort impacts the workforce. We find that minority representation appears to lead to more satisfied workers who express more positive emotions and higher commitment to their employer, and perceive their work as contributing more to the workplace and society.

We also find that the increased works councils’ efforts are directed at general-interest causes instead of gender-specific causes (e.g., childcare amenities) and that workers of all genders appear to benefit from minority representation. These findings are consistent with minority representation creating diverse teams that working harder for everyone’s benefit. They are inconsistent with minority representation simply redistributing effort from majority-specific causes toward minority-specific causes. We also find that required minority representation appears to matter most in smaller councils where zero minority representation frequently occurs absent a quota and that our results are specific to representation of the minority gender, not female representation.

Supplemental findings suggest that better work conditions due to minority representation constitute a plausible mechanism for the improvements in workers’ satisfaction. We, for example, find that minority representation appears to improve communication with employers, reduce discrimination, and, most notably, increase the flexibility and autonomy of workers. By contrast, we do not find significant improvements in workers’ wages and pay satisfaction. These findings document that improvements for workers mainly occur in areas where works councils have the strongest rights. They support the idea that required minority representation leads to more effective advocacy of works councils for their workers.

Minority representation on works councils provides demonstrable benefits to workers, but what is the impact for business managers and owners? Using data from the IAB’s Establishment Panel (BP), we find that required representation reduces worker turnover, a costly disruption to businesses’ operations. In addition, required representation appears to, if anything, positively impact investments, value added, and (worker) productivity of establishments. In terms of economic magnitudes, the estimates imply, for example, that a one standard-deviation increase in required representation increases productivity by about 4%. Thus, the improvements in the satisfaction and work conditions of workers do not appear to come at obvious/detectable costs to employers (e.g., lower productivity). They rather seem to represent joint efficiency gains realized through the inclusion of diverse perspectives in managerial decisions. In line with this possibility, works councils are obliged to focus on joint wins, not one-sided benefits.  Even employers overwhelmingly express support for works councils in Europe.

Our collective findings are consistent with required minority representation solving an agency conflict that is aggravated by biased perceptions about the minority gender (e.g., due to stereotyping). The agency conflict arises between workers and their delegated advocates (i.e., works-council members), who can exert collective effort to advocate for workers or collude and shirk responsibility. The ability to collude and shirk can be hampered by minority representation (i.e., a diverse team). If workers have negatively biased perceptions about the ability of members from the minority gender, they may underestimate the benefits of minority representation. In this case, required minority representation can ameliorate the agency conflict and improve worker outcomes through reduced collusion incentives and/or increased (true) ability of the elected works-council members. Other possible mechanisms, besides reduced collusion, may include improved decision-making due to reduced groupthink and behavioral biases.

Our paper speaks to the controversial debate about the future of capitalism. While calls for more inclusive capitalism grow louder, it remains unclear how to design such capitalism and its institutions without sacrificing economic efficiency. Our study provides evidence on one particular institutional arrangement—works councils with minority quotas—that appears to help workers without clearly hurting employers. Notably, this arrangement appears to deliver joint wins despite the fact that, if left to their own devices, employers would typically not grant workers additional rights (e.g., through a works council) and workers would not elect minority representatives.  (In the U.S., employers are even restricted from granting those rights to workers.)  This observation highlights that, in the presence of institutionalized bargaining power differences (e.g., shareholder primacy) and socialized biases (e.g., minority stereotypes), we may not achieve efficient outcomes, let alone desirable distributional outcomes, without corrective regulatory interventions.

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