Economic Research and Public Policy toward Employee Ownership in the United States

By Conte, Michael A. | Journal of Economic Issues, June 1994 | Go to article overview

Economic Research and Public Policy toward Employee Ownership in the United States


Conte, Michael A., Journal of Economic Issues


Nineteen ninety-four marks the twentieth anniversary of the passage of the Employee Retirement and Income Security Act (ERISA), which codified the Employee Stock Ownership Plan (ESOP) as a form of qualified compensation. There is now a substantial history of employee ownership via the ESOP and a growing record of research evaluations. Based on this, it is possible to make suggestions for policy development.

In this paper, I review some of the basic arguments for tax favored treatment of employee ownership. The review incorporates some of the more important research results that have been achieved, which allow us to evaluate the effectiveness of policies to date. I close with a brief discussion of broad policy options that, in my opinion, follow from these research results.

This paper is too brief to address the many detailed recommendations that have and/or can be made for specific legislation.(1) The goal here is to highlight a few key issues, place them in perspective, and provide a framework for more detailed discussions.

The Basis for Employee Ownership Incentives

In the U.S. economy, markets mediate the collective well-being of producers and consumers. The consensus is that government has a role in promoting, regulating, and otherwise affecting market outcomes only in situations where markets fail to optimize consumer welfare. Therefore, the government has a role in promoting employee ownership only if it can be determined that the market for corporate control provides "too little" employee ownership. There are several reasons to believe that this may be the case.

The Employee Ownership Productivity Effect-Does It Exist and Who Gets It?

The productivity affect of nonmanagerial reward systems in general, and employee ownership in particular, has been extensively debated. However, there have by now been numerous empirical studies that support the view that micro-level productivity is not typically diminished by employee ownership or by ESOPs and that, when combined with employee involvement in decision making, employee ownership appears to have a positive and significant effect.(2) The U.S. General Accounting Office measured this effect as between 4 percent and 5 percent of total labor productivity--i.e., after adopting an ESOP, output per worker rose an average of 4-5 percent as compared with preadoption productivity. The productivity effect for nonparticipative adopters was positive but not significant.

There are many questions remaining in relation to the productivity effect of employee ownership; for example, is there a minimum threshold amount of ownership that is necessary? What types of "participation" are useful in drawing out the greatest efficiencies? Research is continuing on these questions. More fundamentally, however, it has been objected that the real test of productivity lies not in the econometrics, but in reality. In reality, there are few employee-owned firms. If these firms are actually more efficient, why haven't they outcompeted traditionally owned and controlled firms? I refer to this as the "nonexistence" argument.(3)

Even if employee-owned firms are accepted to be more highly productive than traditional firms, government incentives may still not be in order because private parties may fully capture the gains from this added productivity when employee ownership is adopted. If there is no externality, there is no market failure. If this is the case, tax incentives only serve to redistribute monies from taxpayers to employee-owners. I refer to this as the "recapture" argument.

A Prisoner's Dilemma with Transactions Costs-Impediments to Entry

John Cable has provided a neat response to the nonexistence argument. He restates the argument as follows:

. . . (the) continued predominance of traditional work-organization after more than two hundred years of industrialization represents both a vindication of their position, and sufficient testimony to the absence of mutual gains. …

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