Employee Participation: An Evaluation of Labor Policy Alternatives

By Maranto, Cheryl L. | Contemporary Economic Policy, October 1994 | Go to article overview

Employee Participation: An Evaluation of Labor Policy Alternatives


Maranto, Cheryl L., Contemporary Economic Policy


I. INTRODUCTION

The National Labor Relations Board's (NLRB) Electromation decision has generated intense concern regarding the legal status of employee participation (EP) programs. The NLRB found that an EP program dealing with wages and working conditions in a nonunion company violated the National Labor Relations Act's (NLRA) prohibition of company-dominated unions. Business groups have criticized the decision, and the defendant employer has appealed. A bill has been introduced in Congress to modify the standards for nonunion EP programs under the NLRA. President Clinton has appointed a Commission on the Future of Worker-Management Relations to identify and eliminate barriers to EP. Organized labor has advocated broad labor law reform. Thus, the likelihood of labor law reform has increased significantly.

Sections II and III review the theoretical and empirical literature regarding the effects of EP on firm performance. Section IV reviews the legal status of EP programs. Section V evaluates alternative labor policy proposals.

II. THEORETICAL PREDICTIONS OF EP EFFECTIVENESS

Employee participation (EP) encompasses many different programs that provide employees input into workplace decisions: quality circles, employee involvement groups, quality of worklife programs, work teams, and labor-management committees. EP may provide direct or indirect (representative) participation, may give front-line workers a decision-making or only a consultative role, and may restrict EP issues to the work level or include strategic issues like choice of technology (Levine and Tyson, 1990).

Theoretically, EP can enhance firm performance in several ways. (i) Vesting decision-making authority solely in management creates structural incentives for opportunistic behavior--that is, managers may pursue their self-interest at the expense of firm efficiency. By enabling employees to monitor management, EP can increase efficiency and maintain internal cooperative solutions (Smith, 1991). (ii) Firm-specific human capital has been increasing in importance but is immobile and typically lacks due process protections. By providing such protections, EP should increase firm-specific human capital investments (Smith, 1991). (iii) Joint decision-making can generate new and better solutions to problems, since front-line workers possess crucial and unique information (Freeman and Rogers, 1993; Smith, 1991). (iv) EP provides employees financial and operating information, increasing the firm's ability to obtain worker concessions in difficult economic times (Freeman and Rogers, 1993).

Theoretical predictions that EP will reduce productivity focus on agency problems and monitoring costs. Giving employees decision making rights may be inefficient: it increases the number of agents and thus the monitoring costs. Employees also may lack incentives to monitor managers (Jensen and Meckling, 1979).

Poor implementation blunts EP's effect on firm performance. (i) EP increases productivity only if employees are motivated to use their information in the firm's interests and avoid shirking. Thus, EP requires an appropriate group incentive scheme (Levine and Tyson, 1990). (ii) The effect of EP depends on the type of participation and on the presence of supporting employment practices. (iii) EP may increase costs (e.g., lost production time for meetings and greater training costs) more than it increases productivity. (iv) EP with employee empowerment tends to redistribute profits toward workers. EP may not increase productivity sufficiently to offset its effect on profits (Freeman and Rogers, 1993). (Because workers may capture all the economic benefits of EP--a private cost--markets may underprovide EP with employee empowerment.) (v) EP requires a substantial investment that is not as valuable during periods of rapid growth when non-participative firms may earn higher short-run profits and take market share from participative firms. …

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