Work Councils and the Effect of Automation: Evidence from Germany

Authors – Wolfgang Dauth , Sebastian Findeisen , Oliver Schlenker

Abstract:

Labor market institutions, such as work councils, grant co-decision-making rights to organized labor at the firm or establishment level. In Germany, work councils participate in personnel-related decisions and can veto staff dismissals, requiring firms to seek costly court intervention to implement layoffs. In this paper, we show how organized labor interacts with the adoption of automation technologies using micro data from plants and workers.

Using event study designs for robot adoption at the plant level, we observe substantial differences in separation rates, employment rates, and wages between workers in establishments with co-decision-making rights and those without. Notably, robot adoption increases job stability in establishments with work councils, whereas it leads to higher separation rates in the absence of work councils. Older workers (above age 55), who find it more challenging to reallocate to new employers, benefit the most from organized labor at the plant level during an automation event. In contrast, younger workers are able to adjust by moving to new firms when automation displaces their old job. Additionally, we find that robot adoption induces wage growth for incumbent workers, but only in plants with work councils, suggesting a differential rent-sharing of the surplus of automation.

The presence of worker power in decision-making is expected to result in larger productivity effects of automation, as workers have a vested interest in minimizing displacement effects and maximizing positive production outcomes under rent sharing. Our findings support this hypothesis, as we observe that plants with work councils experience greater productivity growth after robot adoption compared to their counterparts without entrenched co-decision-making rights for workers. This is primarily driven by higher investment in the quality, but not the quantity, of robots.