Can codetermination help fix America’s wage problem?

Since the 1970s, a variety of developments — technological advance, globalization, heightened product market competition, the shareholder value revolution in corporate governance, and looser labor markets — have increased firms’ incentive to resist wage increases and enhanced their leverage vis-à-vis workers. Things have been particularly bad in the United States, where labor unions are weak and have been getting weaker. Here’s how Elizabeth Warren put it in a recent Wall Street Journal op-ed:

“Corporate profits are booming, but average wages haven’t budged over the past year. The U.S. economy has run this way for decades, partly because of a fundamental change in business practices dating back to the 1980s…. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns…. Before ‘shareholder value maximization’ ideology took hold, wages and productivity grew at roughly the same rate. But since the early 1980s, real wages have stagnated even as productivity has continued to rise.”

Figure 1 is helpful for assessing wage trends. The data only go back to 1995, but they give us information on wages that includes employer-provided benefits and payroll taxes and they allow us to compare across countries. What we see is that the median American’s compensation has grown much more slowly than the US economy and that compensation growth in the United States has lagged behind that of most other rich democratic nations.

Figure 1. Economic growth and median compensation growth
1995-2013. Median compensation growth: average annual growth rate of inflation-adjusted median compensation (wages plus in-kind compensation plus employees’ and employers’ social contributions). Data source: Cyrille Schwellnus, Andreas Kappeler, and Pierre-Alain Pionnier, “The Decoupling of Median Wages from Productivity in OECD Countries,” International Productivity Monitor, 2017, table 1. Economic growth: average annual growth rate of inflation-adjusted GDP per capita. Data source: OECD. The line is a 45-degree line; a country will lie on this line if its median compensation growth rate is equal to its economic growth rate. “Asl” is Australia; “Aus” is Austria.

Strengthening unions probably would be the most effective way to ensure regular wage increases for middle- and low-paid workers. But accomplishing that is a very tall order. As figure 2 makes clear, America’s declining unionization rate isn’t a recent phenomenon. Nor is it mainly a function of Reagan administration hostility in the 1980s. Unionization in the US has been falling steadily for more than half a century. Indeed, union decline isn’t a peculiarly American problem. Unionization rates have been falling in almost all affluent nations. Only five still have a rate above 40%, and four of those (Belgium, Denmark, Finland and Sweden) are helped by the fact that access to unemployment insurance hinges on union membership. It’s well and good to wish for bigger, stronger unions, but no one has yet figured out an effective strategy to achieve that.

Figure 2. Unionization in the United States
Share of employees who are union members. Data sources: 1900-82 are from Richard B. Freeman, “Spurts in Union Growth: Defining Moments and Social Processes,” in The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, edited by Michael D. Bordo et al, University of Chicago Press, 1998, table 8A.2. 1982ff are from Bureau of Labor Statistics,, series LUU0204899600, using Current Population Survey data.

Are there alternatives to stronger unions? One possibility is “codetermination,” whereby employees elect a portion of their company’s board of directors. Shareholder obsession with short-run profits is one of the key obstacles to wage growth. Giving employees more voice in firms’ decision making might mitigate this.

Opponents of codetermination tend to argue that it will weaken firms’ performance. However, it appears to have had no such adverse effect in the European countries where large firms operate under codetermination rules.

Few companies will opt for codetermination unless they are legally obligated to, so Democratic lawmakers have introduced legislation — the Reward Work Act and the Accountable Capitalism Act — requiring employee election of 33% or 40% of the board of directors in large US corporations. These bills have no hope of becoming law at the moment, but the political environment will shift at some point, perhaps as soon as 2021.

It’s worth noting that even if such a requirement eventually is enacted, codetermination’s reach would be limited. In the Accountable Capitalism Act, the codetermination requirement would apply to companies with annual revenues of $1 billion or more. The roughly 1,300 firms that meet this criterion employ approximately 45 million Americans, or about one-third of the workforce.1

Germany is a helpful test case for gauging codetermination’s impact on wages in a country that doesn’t have especially strong labor unions. While German unions and collective bargaining remain powerful in some manufacturing industries, they have weakened considerably in much of the rest of the economy, as figure 2 shows. But codetermination is solidly entrenched. German workers have been able to elect half of the directors in firms with 2,000 or more employees since the early 1950s and one-third of the directors in firms with 500 to 2,000 employees since the mid-1970s.2

Figure 3. Unionization and collective bargaining in Germany and the United States
Unionization: union members as a share of all employees. Collective bargaining coverage: share of employees whose wages are determined by a collective agreement. Data source: Jelle Visser, “ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts,” version 5.1, 2016, Amsterdam Institute for Advanced Labour Studies, series ud, ud_s, adjcov.

So has Germany had healthy wage growth? No, it hasn’t. As figure 1 above shows, Germany’s record has been similar to that of the United States: growth of median compensation has been much slower than growth of the economy, and it has lagged well behind compensation growth in most other affluent democratic countries.3 Germany’s slow wage growth owes partly to its reunification with the former East Germany in 1990 and its intentional creation of a low-wage (“mini-jobs”) segment of the labor market in the early 2000s. Still, its wage performance gives us little reason for optimism about codetermination’s ability to boost wages in the US.

There are other arguments for codetermination. It might do better at restraining top executives’ pay. It might make firms less likely to downsize during recessions. Perhaps most important, there is a good case on fairness grounds for enhancing employees’ ability to influence decision making in the company they work for. But the evidence supporting codetermination as a remedy for wage stagnation isn’t, in my view, especially strong.

  1. This is an estimate. The 1,000 companies in the “Fortune 1000” have 34 million employees in total, and the firm at the bottom of the list has revenue of $1.8 billion. 
  2. There is only one other rich democratic nation, the Netherlands, that has strong codetermination and a moderate-to-low unionization rate. But unlike in Germany, in the Netherlands collective bargaining coverage remains very high — 85% as of 2014. 
  3. This is true for household income as well.