Labor Representation in Governance as an Insurance Mechanism E. Han Kim, Ernst Maug and Christoph Schneider Presentation at the 1 st CSEF Conference

Transcription

1 Labor Representation in Governance as an Insurance Mechanism E. Han Kim, Ernst Maug and Christoph Schneider Presentation at the 1 st CSEF Conference on Finance and Labor

2 Motivation Question: What is the impact of labor representation on boards on employment on wages firm risk and economic efficiency? 2

3 Efficient contracting: The Insurance Hypothesis Labor representation supports efficient insurance contracts Baily (1974), Azariadis (1975), Rudanko (2011), and others Workers receive insurance in exchange for lower wages, improves risk-sharing Our hypothesis Labor representation prevents ex-post expropriation Labor representation is part of an efficient contract Broader perspective: labor representation overcomes contractual/market inefficiencies: ( ) in incomplete, imperfect markets, a stakeholder system of corporate governance that stresses cooperation between management and employees may allocate resources more efficiently in the long run than a shareholder system. (Fauver and Fuerst, 2006, p. 674, citing Allen and Gale (2002)) 3

4 The shareholder-expropriation view Entrenchment: Labor representation creates and protects rents of workers and managers Jensen & Meckling (1979): if labor representation would be efficient, it would not have to be mandatory; it would emerge in a market without government intervention Pagano & Volpin (2005): managers collude with workers and use workers as a shield against takeovers Cronqvist et al. (2009): entrenched managers pay their workers more The campaigns for worker participation or industrial democracy or codetermination on boards of directors appear to be attempts to control the wealth of stockholders' specialized assets a wealth confiscation scheme. (Alchian, 1984) 4

5 Codetermination in Germany (since 1976) Supervisory Board ( 500 employees) Supervisory Board ( 2000 employees) Shareholder Supervisory Board (>2000 employees) Shareholder Labor Shareholder Labor 6

6 Research questions What is the impact of parity codetermination on employment: do parity-codetermined firms provide more insurance to workers against adverse shocks? Finding: only white-collar and skilled blue-collar workers are protected wages: to the extent that the workers in parity-codetermined firms receive insurance, do they pay an insurance premium? Finding: protected employees pay an insurance premium (of about 3%) firm risk: are parity-codetermined firms more risky because they provide insurance to their workers? Finding: parity-codetermined firms are more vulnerable to industry shocks 7

7 Sample 184 large listed German corporations ( ) All DAX and MDAX companies Most publicly available information (governance, stock market, balance sheet, and P&L data) IAB sample of all German businesses ( ) Detailed establishment level data on industry, location, employment, wages, education, age, nationality In total approx million establishment-year observations for period ,000 establishments matched to 142 of our 184 firms Matching on company and subsidiary names and addresses for the year 2006 (2004, 2005) 8

8 Research design Compare how negative shocks affect employees and firms with parity codetermination vs. firms with less or no representation on the board Difference-in-difference model: y = a + a + dparity + qshock + bparity Shock + g X + e ijkt i t jt kt jt kt ijt ijkt i indexes establishments j indexes firms k indexes industry t indexes time 9

9 Identification of adverse industry shocks Shock needs to be large enough to have a significant impact frequent enough to permit identification exogenous to the firm We use non-sample firms with establishments in Germany (IAB employment data) Based on >30 million establishment-years Industry defined as 3-digit NACE (subsector), similar to NAICS Shock kt = 1 in industry k if employment in the industry decreases by at least 5% only if employment growth 0 in year t+1 (persistence) 10

10 Identification of shocks: Examples Shocks can be long-lived: 4-year shocks: Shock lt+j = 1 if Shock lt = 1 and employment growth 0 in year t+j for j=1, 2, 3 Year Case A Case B Case C Case D Employment growth -6% -2% 0% 2% -1% Shock (4-year interval) Employment growth -10% 2% 0% 2% -1% Shock (4-year interval) Employment growth -10% -2% 0% -2% -1% Shock (4-year interval) Employment growth -10% -2% 0% -5% -1% Shock (4-year interval)

11 Hypothesis 1 Assumptions: firms have better access to capital markets than workers friction in the labor market (search, mobility costs) Theoretical background: Azariadis (1975), Baily (1974), Gamber (1988), Rudanko (2011) Hypothesis 1: Parity codetermination is an ex-post enforcement mechanism that ensures workers receive full protection against adverse shocks to employment and wages. Issues literature mostly assume that firms can commit or that contracts are self-enforcing Harris and Holmstrom (1982), Thomas and Worrall (1988) discuss limited commitment of workers insurance of employment status requires that ex-post inefficient employment survives not just monetary insurance, requires restrictions on ex-post renegotiation 13

12 Do parity firms protect their employees? Dependent variable log number of employees (establishment) (1) (2) (3) (4) (5) Shock Parity (3.00) (3.05) (2.33) (2.16) (1.66) Shock LogFirmEmployees (0.57) Shock (-3.16) (-2.82) (-2.51) (-2.48) (-1.61) Parity (-1.48) (-0.55) (-1.08) (-1.12) (-1.06) LogEstAge (4.03) (3.74) (3.82) (3.73) LogSales (2.30) (0.30) (0.34) (0.29) Leverage (-2.30) (-1.02) (-0.74) (-1.02) LogFirmEmployees (3.93) (1.47) (3.93) adj. R² Observations 52,756 51,271 51,271 51,271 51,271 F-Test: Shock Parity+Shock= Year F.E. No Yes Yes Yes Yes Higher-order terms No No No Yes No Establishment F.E. Yes Yes Yes Yes Yes 14

13 Do parity firms protect their employees? All employees Employment changes after adverse industry shocks 5% 0% -5% Non-parity Parity -10% -15%

14 Do parity firms protect their employees? All employees Employment changes after adverse industry shocks White collar 5% 0% -5% Non-parity Parity -10% -15%

15 Do parity firms protect their employees? 5% Employment changes after adverse industry shocks All employees White collar Blue collar 0% -5% Non-parity Parity -10% -15%

16 Do parity firms protect their employees? 5% Employment changes after adverse industry shocks All employees White collar Blue collar Unskilled blue collar 0% -5% Non-parity Parity -10% -15%

17 Hypothesis 2 Firms provide insurance to workers in exchange for an insurance premium Workers sometimes receive wages above their marginal product Employment relationships are sustained even though they turn out to be ex-post inefficient Firms receive an insurance premium as a quid pro quo If parity codetermination implements insurance, then parity firms should pay lower wages Hypothesis 2: Firms with parity codetermination pay on average lower wages than nonparity firms. 19

18 Do employees pay an insurance premium? Dependent variable: Median wage of Employees w/o educational / vocational qualifications Employees with educational / vocational qualifications Employees with higher educational qualifications (3) (4) (5) (6) (7) (8) Parity (-1.57) (-1.64) (-3.00) (-3.70) (-2.49) (-2.56) LogEstAge (1.89) (1.78) (3.61) (3.49) (6.16) (6.04) LogSales (-0.61) (-0.54) (-2.69) (-2.85) (-0.39) (-0.33) Leverage (-2.90) (-2.88) (-0.65) (-0.64) (0.23) (0.29) adj. R² Observations 43,472 43,472 52,250 52,250 39,675 39,675 Year F.E. Yes Yes Yes Yes Yes Yes Establishment F.E. Yes Yes Yes Yes Yes Yes Additional controls: LogFirmEmployees, LogFirmEmployees 2, LogSales 2 Add l controls in (4), (6), (8): Log#Employees, LogMedianEmplAge, RatioWhiteCollar 20

19 Why are unskilled and low-qualified workers not insured? Occupational status % Unskilled blue collar 0.0% Skilled blue collar 22.3% White collar 56.3% Union representative 21.4% Sum 100.0% Qualification % Low-qualified 0.0% Qualified 59.4% Highly qualified 40.6% Sum 100.0% Occupational status and skills of labor representatives of sample firms Information available for 229 labor representatives from 48 firms in 2008 Information normally not available for union representatives, only for delegates of the workers of the firm (1 delegate always from middle management) Breakdown by qualifications excludes union representatives 22

20 Hypotheses 3 Parity-codetermined firms are more committed to maintain employment and wages than non-parity firms Wage payments become a fixed cost, which increases operating leverage Hypothesis 3a: Parity-codetermined firms suffer larger reductions of profitability after adverse shocks than non-parity firms. According to the insurance hypothesis, parity codetermination increases firms efficiency Hypothesis 3b: Parity codetermined firms are on average more profitable and more highly valued compared to non-parity firms. Issues Overinsurance Bargaining over efficiency gains 25

21 Performance of codetermined firms: ROA & Tobin s Q Dependent variable ROA Log TobinsQ (1) (2) (3) (4) FirmShock Parity (-2.27) (-2.41) (-2.47) (-1.80) FirmShock (-2.13) (-2.14) (-2.24) (-1.70) Parity (-1.75) (-1.42) (1.70) (1.58) LogFirmAge (-3.02) (-2.20) (-3.23) (-2.26) LogSales (8.21) (-4.77) (-0.98) (-8.39) Leverage (-10.21) (-11.48) (-8.13) (-9.72) LogFirmEmployees (-2.89) (-1.74) (2.16) (6.32) adj. R² Observations 1,815 1,815 1,885 1,885 Year F.E. Yes Yes Yes Yes Higher-order terms No Yes No Yes Firm F.E. Yes Yes Yes Yes 26

22 Performance of codetermined firms: beta Dependent variable CAPM beta (5) (6) FirmShock Parity (1.86) (2.21) FirmShock (-1.27) (-1.54) Parity (1.11) (0.78) LogFirmAge (-2.17) (-1.92) LogSales (7.48) (-2.42) Leverage (0.96) (0.34) LogFirmEmployees (2.51) (3.66) adj. R² Observations 1,675 1,675 Year F.E. Yes Yes Higher-order terms No Yes Firm F.E. Yes Yes 27

23 Hypotheses 4 How do firms maintain employment and wages when they face adverse shocks? Asset sales (Atanassov and Kim, 2009): Sell non-core assets Use proceeds to finance wages Consistent with notion that firms provide insurance to core employees only Hypothesis 4: Parity-codermined firms undertake more asset sales when they are subject to adverse shocks 28

24 Codetermination and asset sales Dependent variable Net PPE dummy (7) (8) FirmShock Parity (2.65) (2.64) FirmShock (-1.81) (-1.81) Parity (2.36) (2.33) LogFirmAge (1.75) (1.71) LogSales (-2.28) (-0.10) Leverage (0.49) (0.52) LogFirmEmployees (0.14) (0.38) adj. R² Observations 1,809 1,809 Year F.E. Yes Yes Higher-order terms No Yes Firm F.E. Yes Yes 29

25 Conclusion Core employees of parity-codetermined firms receive employment insurance Skilled blue-collar and white-collar workers benefit Unskilled workers receive no protection Partial financing through asset sales suggests firms care about core employees & assets Employees who receive insurance also pay a premium (~3%) Wages of unskilled workers may also be lower (significance marginal) Parity-codetermined firms have significantly larger operating leverage Larger declines in ROA and Tobin s q, increase in CAPM beta with adverse industry shocks But not much evidence that they are worth more or more profitable 30

26 Backup Slides 31

27 Occupational status vs. educational qualifications Wage regressions can only be performed for levels of qualification Employment regressions can be performed for occupational status The two dimensions can be matched for a random sample of employees from the IAB database from ( Sample of Integrated Labour Market Biographies ) Occupational status vs. educational and vocational qualifications Highly qualified Qualified Low-qualified Sum Unskilled blue collar 0.1% 9.8% 15.5% 25.4% Blue collar 0.1% 25.6% 2.2% 27.9% White collar 7.7% 36.6% 2.5% 46.8% Sum 7.9% 72.0% 20.2% 100.0% 32

28 Employment regressions by educational qualifications Dependent variable High qualified Qualified Low qualified (1) (2) (3) (4) (5) (6) Shock Parity (1.51) (1.65) (2.06) (1.93) (-0.53) (-0.69) Shock (-1.08) (-1.24) (-2.14) (-2.13) (-1.98) (-1.77) Parity (1.24) (1.24) (-0.85) (-0.87) (-0.39) (-0.41) LogEstAge (3.75) (3.70) (2.31) (2.38) (5.20) (5.24) LogSales (0.76) (-0.63) (-0.09) (0.65) (0.38) (1.00) Leverage (-0.11) (-0.32) (-1.48) (-1.38) (-1.06) (-0.73) LogFirmEmployees (3.16) (0.97) (3.91) (1.54) (3.42) (0.69) adj. R² Observations 51,271 51,271 51,271 51,271 51,266 51,266 F-Test: Shock Parity + Shock = Year F.E. Yes Yes Yes Yes Yes Yes Higher-order terms No Yes No Yes No Yes Establishment F.E. Yes Yes Yes Yes Yes Yes 33

29 Occupational status and ethnic background Unskilled blue collar Skilled blue collar White collar Sum German 22.6% 24.5% 43.5% 90.6% Turkish 2.0% 0.5% 0.2% 2.7% Italian 0.7% 0.2% 0.1% 1.1% Yugoslavian 0.8% 0.4% 0.1% 1.3% Greek 0.4% 0.1% 0.1% 0.5% Other 1.9% 0.7% 1.2% 3.8% Sum 28.4% 26.5% 45.1% 100.0% 34

30 The impact of industry competitiveness Dependent variable log number of employees (1) (2) (3) (4) (5) (6) Shock Parity (2.70) (3.28) (2.06) (1.90) (1.56) (1.47) Shock LogFirmEmployees (0.59) (0.69) Shock (-3.24) (-3.74) (-2.67) (-2.61) (-1.80) (-1.84) Parity (-1.60) (-0.73) (-1.21) (-1.24) (-1.20) (-1.23) Herfindahl (-0.16) (-0.73) (-1.07) (-0.97) (-1.09) (-0.99) Parity Herfindahl (2.05) (2.07) (2.80) (2.66) (2.83) (2.69) Shock Herfindahl (-0.10) (-1.76) (-0.54) (-0.64) (-0.53) (-0.62) Parity Shock Herfindahl (0.40) (2.45) (1.17) (1.35) (1.14) (1.31) adj. R² Observations 52,756 51,271 51,271 51,271 51,271 51,271 35