Codetermination and personnel policies of German firms: the influence of works councils on turnover and further training

Abstract

The paper analyses the contribution of works councils to the overall success of German firms during the last few decades. It is argued that a successful implementation of flexible specialization strategies is the cornerstone of German prosperity. The acquisition and effective utilization of firm-specific skills is a precondition of successful flexible specialization. Effective skill utilization itself needs cooperation between employers and employees in order to safeguard the specific investments of either side. Thus, the crucial question is whether the dual system of worker representation in Germany, and particularly the part of the works councils therein, is an efficient institution in the sense that it guarantees the necessary co-operation. In analysing the effects of works councils on personnel turnover and vocational training, we find the works councils to be organizationally efficient, i.e., they balance out employers' and employees' interests. The legal structure underlying the dual system is found to be institutionally efficient because it guarantees this result. Even in times of crisis and if exposed to great pressure, the dual system seems to remain stable, as is illustrated in the light of recent labour market developments that have been triggered by German unification and the last recession.