Labor Representation in Governance as an Insurance Mechanism

We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex-post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Estimation results based on German establishment-level data show that white-collar and skilled blue-collar employees of firms with 50% labor representation on supervisory boards are protected against layoffs during adverse industry shocks and pay an insurance premium of about 3.3% in the form of lower wages. Unskilled blue-collar workers are unprotected against shocks. The effects of employment insurance manifest in higher operating leverage and more major asset sales during industry downturns. The overall evidence suggests that workers capture all the gains from improved risk sharing, making the minimum wage concessions that allow shareholders to be no better or worse off than without codetermination.