German works councils, profits, and innovation

Of the various direct mechanisms of worker participation, the German works council in particular has attracted most academic interest and policy attention because of its mandatory (though not automatic) nature, participative reach, and seemingly limited distributive bargaining function. From a theoretical point of view, the case for mandating works councils is unclear. Not only does it remain to be established that firms will undersupply participation in the absence of a mandate, but even if that case can be made the requisite 'level' of the mandate is opaque. Also, despite its popularity, rather little is known of the effects of German works councils on firm performance or, relatedly, even of their distribution among firms. Using a new data base, containing information on almost 1,000 establishments in Lower Saxony, we find that works councils are associated with significantly lower firm profitability but not with reduced innovative activity. Our findings do not closely support the simple assertions of protagonists or antagonists of this form of worker representation.