Equilibrium unemployment as a worker insurance device: Wage setting in worker owned enterprises

Worker cooperatives are shown to provide higher level of employment, higher employment stability and often greater wage volatility than similar investor-owned firms. A stylized fact that is nevertheless largely unexplained by the literature is the frequent evidence of lower wages in worker managed firms. To engage in the explanation of this fact, we use the Shapiro and Stiglitz (1984) model on efficiency wages and unemployment as a discipline device. Given more efficient monitoring and the absence of wage premiums compensating the expected costs of contract failures, we show that efficiency wages in cooperatives are lower than in investor owned firms while employment is confirmed to be always higher. Our result is due to the informational advantage enjoyed by the firm’s owners, which imply a compensation requested by workers for employer opportunism, and to the role of horizontal control among workers, which reduces the equilibrium level of wages. We conclude that the S-S (1984) result, as applied to worker cooperatives, is a special case of a wider class of equilibria in the presence of contractual imperfections in the agency relation and that different ownership forms can differently impact the unemployment level.