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An Economic Analysis of Works Councils


  • Richard B. Freeman
  • Edward P. Lazear


Works councils, found in most Western European economies, are elected bodies of employees with rights to information, consultation, and in some cases co-determination of employment conditions at local workplaces, mandated by law. Many European employers and unions believe that councils improve communication between workers and management, raising social output, while reducing the speed with which decisions are made. This paper analyzes the operation of councils as a means of improving social output by creating more cooperative labor relations. It argues that councils are mandated because the incentive for companies to institute them and delegate them power falls short of the social incentive; that workers provide more accurate information to employers about preferences when councils have some say over how that information is used; and that the communication from employers to workers produces socially desirable worker concessions in bad times that would not occur absent this institution. It compares a jury style random selection of works councilors with selection via elections.

Suggested Citation

  • Richard B. Freeman & Edward P. Lazear, 1994. "An Economic Analysis of Works Councils," NBER Working Papers 4918, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4918
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    1. Morris M. Kleiner & Marvin L. Bouillon, 1988. "Providing Business Information to Production Workers: Correlates of Compensation and Profitability," ILR Review, Cornell University, ILR School, vol. 41(4), pages 605-617, July.
    2. Hall, Robert E & Lazear, Edward P, 1984. "The Excess Sensitivity of Layoffs and Quits to Demand," Journal of Labor Economics, University of Chicago Press, vol. 2(2), pages 233-257, April.
    3. Masahiko Aoki, 2013. "Horizontal vs. Vertical Information Structure of the Firm," Chapters,in: Comparative Institutional Analysis, chapter 5, pages 57-58 Edward Elgar Publishing.
    4. Kennan, John, 1979. "Bonding and the enforcement of labor contracts," Economics Letters, Elsevier, vol. 3(1), pages 61-66.
    5. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
    6. Motohiro Morishima, 1991. "Information Sharing and Collective Bargaining in Japan: Effects on Wage Negotiation," ILR Review, Cornell University, ILR School, vol. 44(3), pages 469-485, April.
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