Wage determination in the shadow of the law: The case of works councilors in Germany

Abstract

The German law on co-determination at the plant level ( Betriebsverfassungsgesetz) stipulates that works councilors are neither to be financially rewarded nor penalized for their activities. However, lavish payments to works councilors in some large firms have generated a debate about the need to reform the law. This article offers an empirical basis for the discussion and provides representative evidence on wage payments to works councilors for the period 2001–2015. The authors find wage premia of 3–7% in OLS specifications, but observe no wage differentials in linear fixed-effects panel data specifications. Similar results are found for various subgroups of employees and when focusing on employees in particular types of firms. Hence, the results indicate that payments to works councilors are broadly in line with legal regulations.