Works councils in Germany: their effects on establishment performance

Works councils are the most important pillar of workplace industrial relations in Germany but little is known of their economic effects. The paper uses a modern, large-scale dataset to examine this issue. Consonant with recent applied theoretical conjectures, it is found that works councils are associated with reduced labour fluctuation, higher productivity (in larger establishments only), and no reduction in innovative activity. Yet they are also associated with lower profitability and higher wages. This concatenation of results, although not inconsistent with efficiency, underscores the need for closer investigation of the institution given actual and prospective EU works council mandates.