Are Worker-Managed Firms More Likely to Fail Than Conventional Enterprises? Evidence from Uruguay

Abstract

Various theories suggest that worker-managed firms (WMFs) are prone to failure in competitive environments. Using a long panel of Uruguayan firms, the author presents new evidence on firm survival by comparing WMFs with conventional firms. After excluding microenterprises and controlling for differences in the effective tax burden faced by the two types of firms, the hazard of dissolution is 29% lower for WMFs than for conventional firms. This result is robust to alternative estimation strategies based on semiparametric and parametric frailty duration models that take into account unobserved firm-level heterogeneity and impose a range of distributional assumptions about the shape of the baseline hazard. The higher survival rates of worker-managed firms seem to be associated with their greater employment stability. This evidence suggests that the marginal presence of WMFs in actual market economies cannot be explained by the fact that these firms are less likely to survive than conventional firms.

Conclusions

Using a long micropanel of Uruguayan firms, I conducted a survival analysis comparing WMFs and CFs. In contrast to the theoretical pessimism regarding the viability of workers' control in market economies, I find that WMFs exhibit lower hazard rates (longer survival times) than CFs. This finding remains robust to the exclusion of microenterprises, to the exclusion of sectors with high firm turnover, in which WMFs are less frequently observed, and to alternative estimation strategies based on semiparametric and parametric frailty models. Moreover, the results do not seem to be driven by the differential tax regime applied to WMFs. The hazard of dissolution is 29% lower for WMFs than for CFs after controlling for differences in the tax burdens faced by the two types of firms and excluding microenterprises.

This finding seems to contradict several theoretical predictions that WMFs will have performance problems and a higher risk of dissolution, related, for instance, to poor work incentives, inefficient investment and risk taking decisions, and costly collective choice problems (for a review, see Dow and Putterman 2000; Dow 2003). I do not specifically address whether or not WMFs are affected by some of these problems. Nevertheless, the evidence suggests that potential internal inefficiencies are counterbalanced by other comparative organizational advantages.

I examined several possible explanations for the results. WMFs outperform CFs under both recessionary and expansionary macroeconomic conditions, and this suggests that the greater survivability of WMFs cannot be explained merely by the fact that members exercise their control rights over the dissolution decision when outside job opportunities are scarce. Compensation flexibility does not in itself explain the higher survival chances of WMFs because firm survival is generally correlated with lower wage variability. The positive effect of workers' control on firm survival seems to be associated with the greater employment stability exhibited by WMFs. Long-term employment relationships may encourage worker-members to make firm-specific investments and facilitate organizational changes which, in turn, may increase productivity and survival prospects. In addition, workers with job security have a longer time horizon, and this would make group-based rewards and peer pressure more effective, sustaining cooperation in work teams (Levine 1992; Levine and Parkin 1994). Consistent with this argument, survey evidence comparing WMFs and CFs in Uruguay indicates that WMFs employ fewer supervisors compared with CFs, rely more on mutual monitoring among co-workers, and are more likely to introduce organizational innovations such as team work, quality groups, job rotation, and consultation mechanisms (Alves et al. 2012).

Some caveats suggest further analysis. First, direct measures of firm productivity were not available. The evidence indicates that the greater survivability of WMFs is coupled with higher wage growth compared with CFs; however, wage growth is at best a crude proxy of productivity growth at the firm level. This suggests the importance of conducting further longitudinal studies comparing performance measures other than firm survival.⁴⁷ Second, the fact that WMFs survive longer may partially reflect self-selection by both WMFs into industries and workers into organizational forms. It may be the case that WMFs are not randomly sorted into industries but, in other words, enter industries where they might have better survival prospects. Moreover, workers may be self-selected into organizational forms according to unobservable characteristics that might also affect firm survival. As Chiappori and Salanié (2003) pointed out, the combination of unobserved heterogeneity and endogenous matching of agents to contracts is bound to create selection biases toward the parameters of interest. For instance, cooperatives may be able to attract highly motivated workers (Elster 1989). This selection problem is a potential identification threat common to all studies on WMFs based on observational data (Kremer 1997: 13). Interestingly, recent experiments on team production in which subjects are randomly assigned to “democratic” and conventional workplaces also suggest positive incentive effects associated with workers' control (Mellizo, Carpenter, and Matthews 2011). Nevertheless, the sorting process of workers into organizational forms is another important issue requiring further research.

Notwithstanding these issues, the evidence presented here suggests that the marginal share of WMFs in the population of firms and employment in Uruguay can hardly be explained by the fact that these organizations exhibit a higher hazard of failure than conventional firms. The analysis indicates the importance of focusing on both the obstacles faced by workers at the formation stage of a WMF and the growth constraints faced by incumbent WMFs.