A popular idea today is the concept of worker cooperatives, or co-ops. These are often brought up in discussions regarding mistreatment of workers, and increasingly, c-suite executives allegedly profiting at the expense of the working class. Proponents posit that worker co-ops serve as a means of putting power back into the hands of the working class, and as a result, workers will be made better off. Worker co-ops do currently exist in the American economy, but are rare to come by.
What are worker cooperatives, and how do they differ from a typical company?
In this piece a worker co-op will be defined as a business that is owned and run entirely by workers; there is no hierarchy among anyone part of the company, all decisions are made collectively, and profits are evenly distributed to each and every worker.
There may be other variations of worker co-ops that people support, but since this is the system I have most often heard advocated, I will focus on this for the purposes of this piece.
Owners of a standard company maintain shares of said company, which fluctuate based on its assets and profits. If the company does well, the owners’ shares will appreciate in value, but if the company were to undergo severe losses, the owners’ shares would significantly depreciate. Shareholders are able to sell shares at any point, providing them with liquid money. On the contrary, laborers in a standard company receive a cyclical W-2 income, regardless of the well-being of the company, assuming employment is maintained.
In the setting of a worker cooperative, laborers take on the added role of being an owner of the company, thus entitling them to holding shares. This now means they are dealing with a level of uncertainty in their pay that they would not have faced in a standard business. While it’s easy to say that being a part of the decision making process and being granted an equal share of profits is attractive, we should ask whether this added uncertainty is worth those benefits.
Would workers really want to be part of a cooperative?
In my experience, and many of my peers, we were often advised to go to college so that we could enjoy a stable future with consistent and steady income. Whether that’s the reality or not is another discussion, but this is what was pushed by adults throughout K-12 education. For this reason, careers in medicine, law, and IT will always be sought after, as such industries will continue to need workers in years to come, regardless of trends and the health of the economy. These are industries where one knows if they work hard, they will be compensated not only well, but in a consistent and stable fashion. In my view, the vast majority of individuals desire a job where they receive a steady paycheck so that they are always able to provide for their families and themselves at any time. Of course, there are always exceptions to every generalization, and thus we are left with many risk-takers that wish to be the fruitful entrepreneurs that drive our economy. But when considering that roughly 20% of businesses fail during their two years, 45% during the first five, and 65% during the first ten, many people that would like to steadily provide food and shelter for their families, would feel uneasy knowing that their only source of income may quickly disappear if their business ordeal fails, which is clearly quite likely.
Given these circumstances, it may be rational for an individual to forgo such uncertain forms of payment for a stable income, even in spite of the added power one may receive over their work life.
All that being said, even if the assumptions I laid are disputed, or someone were able to convince most workers to support partaking in a worker cooperative, worker cooperatives still may not serve as an efficient means of doing business.
The lack of an entrepreneur inherently sets back co-ops
In a worker cooperative, all workers take on the role of being owners of the business, and essentially become entrepreneurs. Although this may sound empowering, this is not effective when getting into the nitty-gritty. It may be that a hierarchical structure is needed to allow the entrepreneur’s unique role.
First, an entrepreneur has a good or service that they believe others desire, and thus would like to provide it for them, at a reasonable price. The time of that individual is scarce, so if they would like to produce enough for many people to be able to purchase the good/service, they must utilize the labor of other individuals.
Now the question arises of how they are to fairly compensate those who are selling their labor to the entrepreneur at hand.
As explained above, most workers desire some sort of steady income, as opposed to an uncertain wage fluctuating with the success of the company. But how can an entrepreneur pay a steady wage to numerous workers, when they themselves are unsure of the profits they will be making? Frank Knight answers this best: “with human nature as we know it[,] it would be impracticable to or very unusual for one man to guarantee to another a definite result of the latter’s actions without being given power to direct his work.”
In essence, if the entrepreneur is to guarantee the laborer’s wage (the result of the laborer’s actions) considering the uncertainty surrounding profits, then the trade-off is that the entrepreneur must be able to dictate the terms of what the laborer ought to do, and how much they are compensated. For this reason, the laborer whose service was purchased cannot be treated the same as that of the entrepreneur. In a system where all workers are meant to be equal, hierarchy is lacking, and all profits are shared; there is no room for the necessary, distinct entrepreneur.
While the intentions behind improving a worker’s influence in a company may be in good faith, worker cooperatives are not a favorable nor effective means of doing so. In order to truly enhance working conditions, we must allow markets to be unhampered, and competition to reign so that companies must attract workers in order to put out their best product.
Siddharth Gundapaneni is an Economics and Math major at Binghamton University. His research interests lie around monetary theory & asset bubbles, spending restraint, and Public Choice Theory. In his free time, he maintains a monthly blog on substack titled “Macroscope – The Bigger Picture.”
READER COMMENTS
Dylan
Jul 30 2022 at 1:34pm
Siddharth, thanks for the informative and interesting piece.
I found this interesting, because it differs so much from my experience growing up (and I graduated high school more than 20 years ago). I remember how much it was stressed back then that we should expect to not only have multiple jobs, but also multiple different careers over a lifetime. (This statistic is hard to unpack, average job tenure actually increased in the first 15 years or so after I graduated high school, but that seemed to be mostly an artifact of the aging workforce, and if you look at it by age cohorts you see continuing decreases in tenure)
I have no doubt that the majority of workers would prefer a steady income and shifting risk on to third parties…but the realities of working over my lifetime have been a shift away from that model to one where more risk is put on the individual (see defined benefit plans being substituted for defined contributions and high deductible health insurance becoming the norm). Additionally, information technology has continued to reduce transaction costs across industries allowing for the rise of “gig work” which over a third of the workforce has done some form of, and that is expected to rise to more than half by 2026 (not including links because of the spam filter, but this is from a TeamStage report)
The industries I’ve worked in have increasingly moved to a virtual model where it is common to have zero employees and all work is either outsourced or done by independent contractors.
Until a couple of months ago, I was one of those independent contractors working for companies big and small. I now work for one company and make twice as much as I did freelancing, have much better health insurance, and work less hours over all…but that giving other people the power to direct my work is a big, big cost…and I have a feeling I will be back in the riskier but more independent part of the job market before too many years go by.
Siddharth Gundapaneni
Aug 1 2022 at 2:17pm
I appreciate the kind words Dylan.
This is correct, but refers to a different type of risk. The risk involved in defined contributions plans is unrelated to the success of the firm, but rather the specific investments made. I was speaking on risk related to the firm at hand. This distinction is important because this is in part how wages are set, risk and uncertainty of the given firm’s profit.
Art G
Jul 30 2022 at 2:13pm
I find this an interesting take although all theoretical. From operations, to have the most profitable organization the culture needs to be created where all employees feel like they have a stake in the company. If a company has 25 employees, it is best that all 25 are working towards the betterment of the company. This is the situation that one would expect in a co-op. Now, a typical company where at least half of the employees are checked out (let’s say 13 out of the 25). You now have 12 employees working to make the company better. Which situation would you bet on 25 employees looking for efficiencies and doing their work with pride or 12?
john hare
Jul 30 2022 at 5:39pm
From a half century of working and having employees, I would bet on the company having 3 or 4 people looking for efficiencies. The rest just looking to do their job as well as they can. For a truly unfortunate percentage of workers, efficiency consists of putting work off on others. See Too Many Chiefs.
Motivating people is critical, but decisions by committee is stifling. One person will sometimes risk that which a group will never approve.
Andrew M
Jul 30 2022 at 6:36pm
I didn’t know of the Knight quotation, but it sounds as if his insight was purely motivational: if employers are expected to pay employees’ salaries reliably, and their ability to do so depends on the performance of the employees, then employers have to be able to monitor employees’ performance and punish them if they don’t do their jobs.
But there’s also an informational asymmetry between employee and employer. Employees don’t know what to do in order to produce enough to justify a monthly salary of, say, $5,000. If they did know, they would be self-employed. Employers, however, usually do know. It is therefore inevitable in the employment relation that employers should tell the employees what to do. Employees can produce enough to justify $5,000 a month only if they accept the guidance of their employers, who know more. (In effect, employers represent the consumers.) Even conscientious employees who never shirk and need no monitoring need to take direction from their employer.
Leftists complain that workers get bossed around in capitalist firms, but getting told what to do is inevitable in any system, given that it’s costly to learn what it is that consumers want you to do and will pay for. Serious proposals for co-ops, by the way, suppose that the workers will elect a board of managers; they don’t imagine that workers will take day-to-day managerial decisions.
Leo Sammallahti
Jul 30 2022 at 6:41pm
“profits are evenly distributed to each and every worker.”
In my experience as someone who works in a worker cooperative and has been involved with the broader movement, typically, the profits are distributed according to the contribution, not equally. This often means simply hours worked.
vince
Aug 1 2022 at 2:33pm
“This often means simply hours worked.”
The distribution is on hours worked, and not on equivalent output? How do you deal with the problem John Hare mentioned: “For a truly unfortunate percentage of workers, efficiency consists of putting work off on others” ?
Siddharth Gundapaneni
Aug 1 2022 at 6:50pm
There are numerous models for worker cooperatives, and unfortunately I’m unable to address every type in a given commentary. In such a model, the entrepreneur is still needed.
vince
Jul 31 2022 at 6:06pm
To all those who claim worker coops are the solution to labor-exploitating capitalist companies, I offer an ongoing challenge: Start the coop! Show the fools how it’s done! Get all the good employees and kick capitalist arse! Typical response: crickets chirping.
Art G
Jul 31 2022 at 8:58pm
I think this is the crux. Entrepreneurs are not starting co-ops. You average Joe is not going to start a co-op. Potentially a co-op could do better than a company led by empty suits (non-founders), but there is no one to start the co-op in he first place.
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