Equilibrium unemployment as a worker insurance device: wage setting in worker owned enterprises
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Worker co-operatives have been shown as characterised by higher wage volatility while providing higher employment stability compared with investor-owned firms (IOFs). These stylised facts show co-operatives’ stronger tendency to preserve employment more than maximising members’ incomes or profits. Most empirical tests in different national contexts also provide evidence of lower wages in worker co-operatives than in IOFs. Such evidence is unexplained to date. To fill this explanatory gap, we resort to the Shapiro and Stiglitz (Am Econ Rev 74(3):433–444, 1984) model of unemployment as a worker discipline device. Given lower agency costs, more efficient monitoring and the absence of wage premiums compensating for the expected costs of contractual failures, we show that equilibrium wages in co-operatives can be lower than in IOFs, while employment, ceteris paribus, is always higher. We draw the following conclusions: (1) Equilibrium unemployment can be at least partly interpreted as a negative external effect of labour contract failures and bilateral opportunism. (2) Shapiro and Stiglitz’s (1984) result is a special case of a broader class of equilibria characterised by contractual imperfections in the agency relation. (3) Various ownership forms can have different impacts on equilibrium unemployment and wages.
KeywordsEfficiency wage Contractual failure Opportunism Monitoring Abuse of authority Worker-owned enterprises
JEL ClassificationD21 D86 J31 J54 J64
The author writes in her personal capacity. The content of the paper is the sole responsibility of the author and any opinions expressed herein should not be taken to represent an official position of the Parliament. We are grateful to Avner Ben-Ner, Carlo Borzaga, Alessandro Fedele for useful comments and suggestions. Usual disclaimer applies.
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