Works Councils and Collective Bargaining in Germany: A Simple Theoretical Extension to Reconcile Conflicting Empirical Findings

A model by Hübler and Jirjahn (2003) suggests that redistribution activities of works councils are more limited in establishments covered by collective bargaining. The model predicts that works councils have stronger productivity effects and weaker wage effects in covered than in uncovered establishments. While empirical studies provide supporting evidence for the predicted productivity effects, the results on the wage effects are mixed. This article extends the model to reconcile the empirical findings. It takes into account that collective-bargaining coverage not only limits redistribution activities but also strengthens the effectiveness of performance-enhancing work practices negotiated between employers and works councils.