Merits of employee owners

Employee equity ownership of companies has been promoted in the U.S. since the country’s founding. After the Revolutionary War, Treasury Secretary Alexander Hamilton fostered the resurgence of the codfish industry by providing financial subsidies – but only for ships that had written profit-sharing agreements with their crews. This program, enacted in 1792, lasted until after the Civil War.

Today, the idea remains attractive. New research analyzing the past two recessions indicates that even modest ownership of companies by workers might help cushion the blow from economic downturns and boost productivity. A commission co-chaired by economists Larry Summers and Ed Balls has embraced the notion.

The idea is that, in a severe economic crisis, companies whose employees own stock will fare better than others, and this will mitigate the economywide costs that come from job cuts or, worse, company bankruptcies. The great financial crisis provided a testing ground for that proposition, and it seems to have passed.

In their new book, “How Did Employee Ownership Firms Weather the Last Two Recessions?,” economists Fidan Ana Kurtulus and Douglas Kruse link company-level data on employment and financial performance to data on employee ownership for all publicly traded U.S. firms.

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The levels of employee ownership in the Kurtulus-Kruse data are modest: Even among the firms that have some, half have employee-owned shares at or below 1.5 percent of the total value of the company. In 95 percent of the employee-owned companies, employees own less than 12 percent.

Despite these modest shares, the authors find that in response to each 1 percentage-point increase in the national unemployment rate, companies with no employee ownership have cut jobs by 3 percent, while those with an employee stock-ownership plan have cut them by just 1.7 percent. And for companies in which all workers are included in the plan, the fall in employment has been only 0.7 percent. Firms with employee-ownership programs are also somewhat more likely than others to survive recessions.

During the two most recent downturns, companies with employee ownership experienced lower (not higher) short-term productivity than others.

What could explain this? Kurtulus and Kruse point to company culture. In particular, their evidence suggests that employee-owned firms may tend to value long-term connections with their workers, believing they will pay off over time. So, when recession hits, rather than lay off workers, they use the downturn to retrain them and build up their skills in new areas. During that time, measured productivity falls, but it recovers as the investment in human capital reaps dividends.

Figuring out what helps to raise firm-level productivity matters for more than that firm alone. For too long, economists have viewed company performance and culture as an area of interest mostly for management consultants, and have tended to downplay the importance of differences among firms. But more and more, we are learning what goes on inside some firms and not others may have surprisingly large effects on the economy as a whole. •

Peter R. Orszag is a Bloomberg View columnist.