the Worker Cooperative

Given that the prevalence of the traditional “shareholder” business model (characterized by a perverse incentive structure resulting from hierarchical management and external ownership), coupled with the trend toward neoliberal globalization, is a primary cause of several debilitating ills (i.e. un and underemployment, downsizing, outsourcing, etc.) currently afflicting the “developed” world (I.e. the United States, Canada, and Western Europe), economists are compelled to examine the viability of alternative firm types in a contemporary capitalist context. One such alternative is the worker cooperative business model. The term worker cooperative refers to generally for-profit businesses that are jointly-owned and democratically controlled by the firms’ employees. Such businesses expand economic democracy without rejecting the market and de-emphasis the aspects of private economic activity that prioritize short-term profit-maximization. Many argue that the worker cooperative business model both promotes jobs and businesses that are more economically sustainable than those delivered by traditional firm types and encourages more egalitarian wages among a firm’s worker owners.

Data show that worker cooperatives are either more or as productive as traditional firm types. Any increase in productivity among worker cooperatives is likely attributable to the increased rights to the returns of such firms among their employee owners. By expanding employees’ stakes in firm outcomes, worker cooperatives enhance the incentives among these individuals to improve their performances. The result is greater employee morale and cohesion and a better intra-firm flow of information. Importantly, some note that the size of an employee’s right to the returns of their firm is significant. Specifically, the larger an employee’s material stake in firm outcomes, the greater the increase in firm productivity. For that reason, when firm profit sharing and employee ownership is limited, productivity is only excepted to be marginally enhanced.

Worker cooperatives generally retain greater survivability rates and longevity than traditional firm types. Specifically, firms that are 100% owned by their employees, worker cooperatives, are only 33.5% as likely to fail or face a merger/acquisition as other firms. By directly linking ownership to employment, worker cooperatives greatly reduce the incentive among worker owners to make business decisions that are profitable in the short term at the expensive of long term firm health. Additionally, the increased productivity and intra-firm investments in employee training that define worker cooperatives facilitate greater firm sustainability.

Wages tend to increase as employees’ share of ownership in their businesses grows, with worker cooperatives generally showing the strongest wages. When additional costs on firm profitability associated with traditional firm types, like CEO compensation, are eliminated in worker cooperatives, a more egalitarian distribution of wages usually results. Additionally, research indicates that employee benefits are stronger in worker cooperatives than traditional firm types, with some worker owned grocery stores even providing healthcare coverage to part time employees. The realignment of business priorities in worker cooperatives naturally results in an increased focus on firm labor over capital, with obviously beneficial results for employees.

Because worker cooperatives involve employees in the decision making process, such firms generally tighten their belts and weather short term hardships more nimbly and less painfully than traditional firm models. Specifically, worker cooperatives are more likely to adjust wages when faced with adverse economic situations than lay off employees as this would involve firing themselves. These temporary pay cuts are collectively agreed to with the understanding that recouping compensation will be achieved through future profits. Importantly, research also indicated that worker cooperatives showed a greater tendency to maintain, and strikingly sometimes increase, employment levels during economic recessions. The Great Recession, specifically, was weathered by worker cooperatives much more successfully than traditional firm types in France, Italy, and Spain.

Enhanced employee agency, brought about through self management, strengthens job satisfaction and limits quitting. While self management comes with increased responsibilities among worker owners, the benefits of this change seem to outweigh the negatives, with such firms encouraging greater employee owner independence and value. With the prioritization and heightened value of labor in worker cooperatives, such firms generally devote more resources to the education of their employees than traditional firms (they must as these employees are or will become owners as well). Greater skill accumulation and worker value results from this renewed focus, ultimately hampering the general economic trend towards labor commodification.

Yet for all that, worker cooperatives face a number of potential challenges. For one thing, some scholars warn that a free rider problem can potentially arise when an individual’s reward is pegged to their group’s performance. They specifically fear that employee owners won’t fully apply themselves to their work if their assumption is that they will be paid, regardless of their effort, according to the productivity of their firm. Additionally, these scholars stress that as the size of worker cooperatives increases, the incentive to work hard individually could decrease. These negative assumptions, purely abstract and theoretical in nature, don’t take into account the realities of intra-firm horizontal, or peer, monitoring in the workplace and the aforementioned measurable productivity gains, resulting from heightened morale and cohesion, that have been observed among really existing firms that utilize cooperative ownership and management.

Some scholars suggest that the heightened financial risk associated with the ownership of a business is to great for individual workers to shoulder. Whereas traditional business owners, generally comparatively wealthy, can often afford to experience business failure, some contend that such occurrences could be crippling to less well off worker owners. This worry overlooks, or undervalues, the fact that risk is highly divided among worker owners, thereby assuaging some of the risk involved in potential failure. Furthermore, high levels of unemployment in the modern economy indicate that job loss for an employee in a traditional firm can be just as crippling.

Surely the most problematic challenge facing worker cooperatives lay in the potentially challenging need to acquire, at least initial, financing. Start-up costs in particular are difficult to muster from potential worker owners themselves and wealthy outside investors have little reason to inject funding into a potential business that they can’t profit from. Worker cooperatives will likely need to rely on external loans in order to form a business. Inter-cooperative lending (cooperative networks with internal banking) and publicly financed loans are some ways to address this challenge.

Source: Georgeanne M. Artz and Younjun Kim, “Business Ownership by Workers: Are Worker Cooperatives a Viable Option?” Iowa State University, Department of Economics (2011): accessed May 2, 2014, http://www.econ.iastate.edu/research/working-papers/p14575.

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