Why aren’t companies owned by the people who work for those companies? It seems like a natural way to organize a business. Americans are used to the standard setup: Outside shareholders elect a board of directors that chooses executives to run the business. But there’s no legal reason companies have to be structured this way. The rules of American capitalism allow for workers to be the shareholders in their own business, and to make decisions for that business. But as of 2016, there were only 357 worker cooperatives in the entire U.S., employing just 7,000 people.
Worker-owned businesses might not act much differently from conventional companies in the market. Whether a company is owned by outside shareholders or by its own employees, the incentive to maximize profits should be similar. It seems unlikely that cooperatives would be more altruistic, honest or socially responsible than the corporations that exist now.
The big differences would come in the way companies are organized, and who reaps the benefits. Corporate profits now represent about 6.6 percent of U.S. gross domestic income, while labor compensation is 43.2 percent.
That means that if profits flowed to workers instead of distant shareholders, the average worker could get a raise of about 15 percent.
What’s more, cooperatives might help reduce inequality. Workers in a cooperative can vote to pay executives less and pay themselves more, making the compensation structure more egalitarian for the entire company. There is some evidence that this happens. Mondragon Corp., Spain’s largest worker-owned business, pays its CEO just nine times as much as the average worker – a much lower ratio than most companies in the U.S.
It’s hard to measure, but flatter corporate hierarchies might yield intangible benefits, too. Instead of feeling like rented labor, workers who own part of their employer might feel a greater sense of ownership, pride, control and loyalty.
Beyond reducing inequality and giving labor a bigger slice of the pie, that might lead to higher productivity. Better morale might make workers put more effort into their jobs and to encourage their coworkers to work harder. Cooperatives might also benefit from more direct worker input, bringing firsthand knowledge of production into the decision-making process. Data on this question are mixed. A landmark 1995 study of plywood manufacturers by economists Ben Craig and John Pencavel found that in terms of output per hour, conventional businesses had higher productivity than cooperatives, but in terms of total factor productivity – which measures the efficiency with which companies use all their inputs – the co-ops had the edge. This suggests that cooperatives don’t encourage greater effort, but they do organize production in more efficient ways. A 2012 paper by economists Fathi Fakhfakh, Virginie Perotin and Monica Gago found a similar result for cooperatives in France.
A final benefit of cooperatives is that they might be less subject to asset-stripping by short-term investors and shed fewer workers in recessions. There is some evidence that cooperatives have higher survival rates than other businesses, especially during the recent recession. These effects might be magnified in the U.S., with its more rapacious private-equity industry.
Worker cooperatives thus seem like they hold the potential to fuse the best elements of capitalism – free markets and private enterprise – with the age-old socialist dream of workers owning and controlling the means of production. So why are they so rare?
One obvious reason is that they’re hard to get off the ground. Since banks and lenders are generally unwilling to lend money to new companies with little collateral or proven ability to make payments, early stage companies tend to fund themselves by selling their stock – but cooperatives can’t do this, or they’re no longer cooperatives.
Another reason is that cooperatives may suffer from distorted incentives. Whereas a traditional corporation will try to pay high-ability employees more (in order not to lose them to the competition), co-ops may opt for less variation in pay. Economist Michael Kremer has suggested that democratic redistribution within cooperatives dulls worker effort, while economist Gabriel Burdin has found evidence that more skilled and ambitious workers tend to quit co-ops.
There’s no shortage of other potential explanations for the rarity of cooperatives. Yet these businesses may slowly be gaining on their more ruthless capitalist cousins. As big businesses gobble up smaller ones, cooperatives may have a survival advantage. Meanwhile, a team of lawmakers including Sens. Bernie Sanders and Elizabeth Warren has introduced a plan to help promote worker-owned businesses. The plan would offer low-interest loans to cooperatives, helping them surmount the financing barrier. It would also provide funding to states to provide training and technical support for workers looking to start this sort of business.
So although it will be slow going, worker cooperatives may eventually become an important piece of a healthier, more egalitarian economy.
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