We show that employee ownership is more efficient than control by external capital owners/employers. This complements the empirical evidence for benefits of employee ownership surveyed by Mygind and Poulsen (2021), Kruse (2022) and Dow (2003), and the normative political case for democratising work made by Ellerman (1975, 2022), Ferreras et al. (2022), Piketty (2022) and others. Of course, efficiency issues are usually important in economic evaluation.
Worker mobility or “exit” is generally costly, so employers with residual control have monopsony power to exploit workers with non-contractible job utility – who are thus less than perfectly mobile and, in the absence of collective bargaining, lack countervailing “voice”.
The potential for wasteful conflict and exploitation is inherent in the employment relationship, and socially optimal effort is unlikely to be achieved. We show that economic efficiency in a “sticky” world (Banerjee and Duflo, 2019) with imperfect information and incomplete contracting actually requires residual control by workers rather than just capital-labour parity in “democratic socialism”, so labour should hire capital rather than vice versa.
The “labour hires capital” allocation of rights contrasts with the traditional power of capital-owning employers who claim the firm’s residual income and control of hired employees. Such shareholder primacy not only deprives employees of their rights of self-determination and generates conflict, but also, and less obviously, generally fails to attain the efficient effort-output trade-off.
