Equilibrium Unemployment as a Worker Insurance Device: Wage Setting in Worker Owned Enterprises

Worker co-operatives have been shown as characterized by higher wage volatility while providing higher employment stability compared with investor-owned firms (IOFs). These stylized facts show co-operatives’ stronger tendency to preserve employment more than maximizing members’ incomes or profits. Most empirical tests in different national contexts also provide evidence of lower wages in worker co-operatives than in IOFs. Such evidence is unexplained to date. To fill this explanatory gap, we resort to the Shapiro and Stiglitz (Am Econ Rev 74(3):433–444, 1984) model of unemployment as a worker discipline device. Given lower agency costs, more efficient monitoring and the absence of wage premiums compensating for the expected costs of contractual failures, we show that equilibrium wages in co-operatives can be lower than in IOFs, while employment, ceteris paribus, is always higher. We draw the following conclusions: (1) Equilibrium unemployment can be at least partly interpreted as a negative external effect of labor contract failures and bilateral opportunism. (2) Shapiro and Stiglitz’s (1984) result is a special case of a broader class of equilibria characterized by contractual imperfections in the agency relation. (3) Various ownership forms can have different impacts on equilibrium unemployment and wages.