Does Giving Workers Board-Level Representation Lead to Better Workplace Outcomes?

The study examines how worker voice, through board representation, impacts productivity, job stability, and job quality. Using a difference-in-differences approach, it analyzes Finnish firms affected by a 1991 law granting worker representation in firms with at least 150 employees. The study finds a 6.7% increase in labor productivity and a 14% reduction in involuntary separations, but no significant decrease in voluntary job turnover. Wages show a 2.4% increase with some pay compression. While job satisfaction improved by 0.15 to 0.18 standard deviations, overall job quality effects were limited. These findings highlight worker voice’s role in employment stability and productivity gains.

Full Citation and Link to Article

Harju, Jarkko, Simon Jäger, and Benjamin Schoefer. "Voice at Work". AMERICAN ECONOMIC JOURNAL: APPLIED ECONOMICS (FORTHCOMING). https://www.aeaweb.org/articles?id=10.1257/app.20220451

Extended Summary

Central Research Question

The research paper Voice at Work by Harju, Jäger, and Schoefer examines the effects of worker representation on company boards and advisory councils. Specifically, it seeks to understand how worker voice impacts productivity, job quality, and employment stability. The study is motivated by the question: Does providing workers with a formal voice in corporate governance lead to improvements in firm performance and worker outcomes?

The study leverages a natural experiment in Finland, where a 1991 law granted workers the right to board representation in firms with at least 150 employees. This policy was primarily intended to facilitate communication between management and workers, without giving employees formal decision-making authority. The research analyzes the causal effects of this intervention on firms and workers, focusing on labor productivity, job separations, job quality, and wages.

The study finds that while worker voice increases labor productivity and reduces involuntary separations, it has limited effects on voluntary turnover and overall job quality. These findings provide new insights into how non-binding worker representation influences workplace dynamics, particularly during periods of economic instability.

Previous Literature

The study builds on several strands of existing literature related to worker voice, labor economics, and corporate governance. The foundational theory of exit and voice, introduced by Hirschman (1970), suggests that workers dissatisfied with workplace conditions can either quit (exit) or express concerns to improve their situation (voice). The study tests whether formal worker representation serves as an effective form of voice, reducing employee turnover and enhancing job quality.

Previous studies on codetermination in Germany and other European countries have found mixed results. Some researchers argue that worker board representation increases cooperation, trust, and firm productivity (Freeman & Medoff, 1985; Freeman & Lazear, 1995), while others suggest that it can create conflicts of interest and inefficiencies(Jensen & Meckling, 1979). A significant challenge in prior research is that codetermination laws are often bundled with other labor regulations, making it difficult to isolate the effects of worker voice alone.

The Finnish setting offers a unique opportunity to study worker voice in a more pure form, as the 1991 law explicitly avoided reallocating formal decision-making authority to workers. Instead, it focused on information sharing and communication between employees and management. This study contributes to the literature by providing causal evidence on worker voice using a quasi-experimental research design.

Data

The research relies on administrative data from Finland, allowing for detailed firm-level and worker-level analysis. The primary data sources include:

1. Matched Employer-Employee Data: Provides information on employment duration, job separations, and wages from 1988 to 2017.

2. Financial Statement Data Panel: Covers firm-level productivity, profitability, and survival rates.

3. Finnish Quality of Work Life Survey: Includes subjective measures of job quality, such as worker satisfaction and workplace relations.

The study focuses on firms with employment near the 150-worker threshold in 1988, the earliest available pre-reform year. Firms just above this threshold were subject to the law, while firms just below it were not, creating a natural comparison group.

Additionally, the study explores the effects of a 2008 reform that expanded shop-floor representation to smaller firms. However, the 2008 reform had more limited effects, suggesting that the primary 1991 policy was the main driver of changes in worker voice outcomes.

Methods

The study employs a difference-in-differences (DiD) research design, comparing firms above and below the 150-employee threshold before and after the reform. This method helps isolate the causal effects of worker voice by assuming that firms on either side of the threshold would have followed similar trends in the absence of the law.

Key aspects of the methodology include:

• Treatment Group: Firms with 150 or more employees in 1988 (affected by the law).

• Control Group: Firms with 50 to 149 employees in 1988 (not affected by the law).

• Time Period: 1988 to 1997, with 1990 as the baseline year before the reform.

• Robustness Checks: The authors conduct placebo tests, alternative bandwidth selections, and firm fixed-effects analyses to ensure the validity of their findings.

The study also examines potential heterogeneous effects, such as whether the law had different impacts during Finland’s deep recession in the early 1990s. By controlling for industry-specific shocks, the analysis ensures that the estimated effects are attributable to worker voice rather than broader economic conditions.

Findings and Size Effects

The study identifies several key effects of worker voice on firms and employees:

1. Labor Productivity Increased by 6.7%

   • The introduction of worker representation improved labor productivity by 0.067 standard deviations (SE 0.031) in a reduced-form analysis and 0.132 standard deviations (SE 0.062) in an instrumental variables approach.

   • This effect supports information-sharing theories, suggesting that greater communication between workers and management enhances coordination and efficiency.

2. Involuntary Separations Declined by 14%

   • Worker representation reduced involuntary job separations (layoffs) by 2 percentage points, or 14% relative to the baseline.

   • This finding aligns with implicit contract theories, where worker voice reduces layoffs by improving firm-worker trust and reducing information asymmetries.

3. No Significant Effect on Voluntary Turnover

   • Contrary to the exit-voice hypothesis, the study finds no strong evidence that worker voice reduced voluntary job separations.

   • Job-to-job transitions declined by only 0.7 percentage points, suggesting that worker representation did not significantly increase job satisfaction or retention.

4. Wages Increased by 2.4%, with Pay Compression

   • Worker voice led to a 2.4% increase in average wages and a marginally significant 1.6% increase in firm-specific wage premiums.

   • The effects were concentrated among lower-wage workers, leading to some degree of wage compression.

   • These findings are consistent with previous research suggesting that worker representation reduces wage inequality within firms.

5. Limited Effects on Subjective Job Quality

   • While there was a small increase in job satisfaction (0.15 to 0.18 standard deviations), other indicators of job quality, workplace safety, and worker health remained unchanged.

   • Surveyed worker representatives reported that their role improved communication but did not provide decision-making power.

6. Firm Survival and Profit Margins Were Unaffected

   • The study finds no significant changes in firm survival rates or profitability, indicating that worker representation did not impose significant costs on businesses.

     
     

Conclusion

The study provides causal evidence on the effects of worker voice by leveraging a quasi-experimental setting in Finland. The findings suggest that worker representation on boards and advisory councils can enhance productivity and job stability without harming firm performance.

However, the results challenge the traditional exit-voice theory, as worker representation did not significantly reduce voluntary turnover or broadly improve job quality. The strongest effects were on reducing layoffs and improving productivity, suggesting that worker voice functions more as a coordination mechanism than as a tool for increasing worker influence over decision-making.

These findings have policy implications for countries considering worker representation laws. While worker voice may improve firm efficiency and employment stability, it does not necessarily lead to higher job satisfaction or retention. Future research could explore whether stronger worker participation models, such as German codetermination, yield different outcomes.

Ultimately, the study highlights the importance of information-sharing institutions in shaping labor market dynamics and provides valuable insights into the role of worker voice in modern workplaces.