Works Councils and Collective Bargaining in Germany: The Impact on Productivity and Wages

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Abstract

This paper investigates the interaction between establishment-level codetermination and industry-level collective bargaining in Germany. Based on a bargaining model, we derive our main hypothesis: In establishments covered by collective bargaining agreements, works councils are more likely to be engaged in productivity-enhancing activities and less engaged in rent-seeking activities than their counterparts in uncovered establishments. Our empirical analysis confirms this hypothesis. The presence of works councils exerts a positive impact on productivity within the covered industrial relations regime but not within the uncovered regime. The presence of works councils has a positive effect on wages within the uncovered regime but not to the same degree within the covered regime.

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