The Exit-Voice in Employee Relations:

Works Councils and the German Industrial Landscape

In an episode of the now cult-classic American mockumentary sitcom The Office titled “The
Negotiation”, warehouse worker Darryl Philbin at the Dunder-Mifflin paper company
approaches his boss Michael Scott to ask for a 10% raise in return for the extra workload he
had shouldered after his co-worker was fired. In the conversation, Darryl makes it clear to his
boss that having worked in the company for years not only was he due for a raise but his
recent steep rise in workload meant that it was immediately necessary, lest he leave. Both
seem acutely aware that the cost of Darryl quitting would have to be borne at both ends;
Michael couldn’t afford to have ordered backed up because the warehouse lost its long-time
manager and Darryl would simply find it difficult to find another job in an otherwise dry
Scranton. This creates a push and pull situation where the prospect of Darryl ‘exiting’ had
created a necessity for discussion where he decides to ‘voice’ his concerns in the hopes that
they would be redressed. While the actual episode features an explicit power imbalance
between the two parties to much comedic effect, this episode, aptly titled “The Negotiation”
is essentially a rudimentary representation of some of the core concepts that Albert
Hirschman’s treatise on exit, voice and loyalty proposes.

This seminal publication titled Exit, Voice, and Loyalty published in 1970 was authored by
leading German economist and thinker of political economy, Albert O. Hirschman who used
the treatise to shed light on a dilemma that consumers are confronted with in the event of
deteriorating quality of goods (Hirschman, 1970) – should they simply ‘exit’ the transaction
and look elsewhere or should they stay to ‘voice’ their dissatisfaction at the plummeting
quality in the hopes of improvement? Essentially, the exit-voice question proposes the
existence of a clear trade-off between the choices that follow the particular consumer
dilemma – exit from the market is obviously a defeat of purpose for the consumer and for the
firm, it is simply a loss of profit. On the other hand, voice is an alternative to this risk, a
solution that helps avoid this heavy cost on both parties by an initiation for discussion and
redressal of dissatisfaction from the consumer’s end that usually demands a change in
behaviour from the firm. In a lot of ways, therefore, consumer-firm interactions are defined
by this push and pull pattern that would arrive at a compromise, ideally, with both succeeding
in avoiding the cost of exit (Hirschman, 1970).
Naturally, this revolutionary framework has been greatly influential, having been widely used
(and still being used) as a template to analyse interactions between key actors across the
fields of economics, politics, business, and specifically our primary concern here, employee
relations (Frege and Kelly, 2013).
Were we to look at employee relations through the framework of Hirschman’s exit-voice
lens, we would likely notice that exit is rather a last resort option with voice and loyalty being
thought of as the first priority (Dundon and Wilkinson, 2019). The issue of voice, its
implementation and the implications of that implementation come to the forefront in the area
of employment relations. In their 2019 article, Dundon, Cullinane and Wilkinson defines
voice as follows:
 Expression of individual dissatisfaction raised with line manager or
through grievance procedure.
 Expression of collective dissatisfaction raised by trade unions through collective
bargaining or industrial action.
 Contribution to management decision making through upward problem solving,
suggestion schemes and attitude surveys.
 Demonstration of mutuality through partnership agreements, joint consultative
committees and works councils.

Here too there exists an inherent trade-off between exit and voice that pressures employees to
make a choice when faced with a deterioration in employer behaviour. Knowing the choices
i.e quitting the job (exit) or expressing their woes (voice) (Freeman 1980), serious cost would
be in store for both parties should the prior be the outcome. For the firms, this would mean
high turnover of employees, posing high expenses of relieving, hiring, retraining among
many others. For the employees, it means, quite simply, a loss of income and the added
burden of finding new employment opportunities. Voice is also premised upon the idea that
there exists an information gap between employees and employers which can prove
extremely valuable to each other. On exit, this information goes unexplored, an unwise move
when looked at from a theoretical perspective. This trade-off, therefore, is central to the
employment relations approach to exit-voice (Won 1980). For example, there exists
significant empirical research proving this reduction of exit in the form of lower quit rates
and higher job tenure (and hence a fall in turnover) as a result of employee voice expressed in
the form of collective bargaining. It also suggests that both wage and non-wage effects of the
voice interpretation approach (here, trade unions/collective bargaining) are significant in
reducing turnover and increasing job tenures (Freeman 1980). There have also been
suggestions that voice as a path may lead to the dreaded exit itself in certain conditions
(Burris, Detert and Romney, 2013) but that is a topic we shall remain from addressing in
here.

It may also be worth exploring another tool for voice in the workplace, namely, work
councils. An important type of non-union tool that aids employee voice in the workplace,
works councils can be broadly defined as a body, usually elected, that is tasked with the
responsibility of representing interests of the entire workforce within any particular
establishment vis-à-vis that one employer, exercising a range of duties including workplace
level consultation, observation of laws and collective agreements, avoiding discrimination
etc. (Dibben, Klerck and Wood 2011). They do not cut across different managements as trade
unions may do. Works councils may or may not be legally mandated in countries, but it is
important to note that in most cases, they are accorded legal status. Testifying to the one
overarching theme that dominates most discussions in employee relations, unsurprisingly,
works council systems vary in structure and functioning across countries and different
contexts (Rogers and Streeck 1995).
One may ask then: are there contextual/conditional characteristics that may bear an impact on
the success of works councils?
The effectiveness of works councils is often highly dependent on the existent industrial
framework of the country (Carley, Welz and Baradel, 2005).
Generally, the larger cultural fabric of a country has significant impact on whether the
industrial framework is democratic in nature or not. It has been observed that works councils
work most effectively in countries with an already established strongly democratic industrial
setup. This can be attributed to several reasons, most important of which is the cultural
receptiveness to the representative nature of works council (Brewster, Croucher and Prosser,
2019). For example, works councils could be exceedingly difficult to implement in a country
where the political/economic setup is shouldered on an absolute monarchy such as Saudi
Arabia or Qatar. Therefore, given the inclusive, diversity and representation-oriented nature
of works councils (as discussed in the introduction), it is inherently better suited for efficacy
in countries that have valued those particular ideals historically. Attempting to implement
works council policies in a hostile environment might be faced with impediments such as
slow, expensive implementation or even backlash from the workforce. This is generally
referred to as ‘social partner views’ (which in this case would be negative) (Johnstone and
Ackers, 2015). As such, this is in directly in conflict with employee voice concerns.

Works councils also may be only as effective as the response it receives from the existing
voice representations (Carley, Welz and Baradel, 2005). Historically, for example, union
dominated industrial frameworks have been deeply suspicious of works councils (for
example, USA pre-80s was hesitant towards) but in other cases, they have eventually been
able to coexist and even find common goals in employee relations to become fundamental to
each other (for example France, Germany etc.).

In practice, works councils themselves should be able to recognise, adapt and fully take on
their own role as the cooperation intermediary between workforce and management. This
recognition when coupled with the union responsibility towards social partnership can work
complementarily to avoid rivalry between both (Hubler 2015). If not, the basic conflict in
identity and goals between unions and works councils can lead to messy political and
economic consequences (Hubler 2015) all of which can be counter-productive to the goal of
enhancing employee voice.

Ultimately, the success of any works council in delivering success to the employee voice
cause is relies on the proper definition and assignment of actors, their interests and the
existing power resources they are governed by (Frege and Kelly 2013).
Without a clear and sharp understanding of the depth and boundaries that define these
elements in any employer-employee (plus state) agreement, long-term sustainability might be
a remain a distant dream. Reality is often far more complex than can be predicted by any
theory and there are few precautions we can take to tackle it, most important of which can be
the defined integration of the three main actors (workers, employers and state) and non-
traditional actors, their interests and the power resources at play (Frege and Kelly 2013).

Works councils have a positive impact on information flow between workers and employers
(a key step towards better voice representation) and therefore, performance, showing equal
potential in contributing to effective regulation of firms in a way that reflected the ideals of
industrial democracies (Rogers and Streeck 1995). Workers exercise more control over
management decisions and policies of the firm and enhanced trust forms between both parties
leading to greater job satisfaction. This also boosts investor trust leading to a rise in firm
specific capital investment. The works councils also play a role in mediating disputes
between management and employees and negotiating collective bargaining agreement
(Hubler, 2015). However, they aren’t without their downsides. They are, ultimately, a burden
on quick decision making. An added actor (here, the employee) in any decision-making
process not only causes a slowdown but also adds to the already heavy bureaucratic setup and
red tape increasing employee and employer apprehension. Further, works councils are
vulnerable to manipulation from any end (owing to the status quo asymmetry in information),
be it trade unions, employees themselves or managements fudging with election processes
(Rogers and Streeck 1995).

We may now take a closer look at the German industrial landscape. Germany is known for its
strong tradition of co-determination, which is the participation of employees in decision-
making processes within companies (Carlson, 2018). After World War II, the country
established a new democratic system with a strong emphasis on social partnership and
consensus-building between labor and management processes (Brewster, Croucher and
Prosser, 2019). Seminal to this progress was the newly enforced German Works Constitution
Act which acted as the main legal framework for works councils and employee representation
in Germany and provides the basic guiding framework for the country's system of co-
determination (Keller, 2005). The first works councils were established in the 1950s, and the
system has since evolved to include a range of mechanisms for employee representation and
involvement in decision-making processes (Brewster, Croucher and Prosser, 2019). In
essence, this was seen as a way to promote stability and avoid the conflict that had
characterized the country in the past.
In the German system of industrial relations, employee voice is exercised through various
mechanisms, including:
1. Works councils
As mentioned before, elected bodies representing employees in companies with more
than five employees. They have the right to be consulted on a wide range of
workplace issues and to negotiate with management on behalf of employees.
2. Labor representatives on company board
In companies with more than 2,000 employees, a certain number of seats on the
board of directors are reserved for employee representatives, who are elected by the
workforce.
3. Collective bargaining agreements
 These are negotiated between works councils and management and set the terms and
conditions of employment for all employees in a company or sector (Frege and Kelly
2013).
Through these mechanisms, employees may ensure that their interests and perspectives are
considered, promoting a sense of ownership and commitment among the workforces (Jaeger,
Noy and Schoefer, 2019).
This has contributed to the country's reputation for stability and prosperity and has helped to
maintain good labour-management relations that places employee voice at the forefront of its
agenda (Brewster, Croucher and Prosser, 2019), becoming a model for other countries
seeking to promote cooperation between labour and management. As a result, industrial
relations in Germany is generally characterized by a high level of cooperation and a low
incidence of industrial conflict (Brewster, Croucher and Prosser, 2019).
While Germany's system of co-determination and employee representation is widely regarded
as a model for promoting employee voice in the workplace, there are some criticisms and
limitations of the system that are worth considering (Jirjahn and Smith, 2018). Some of the
downsides of the system with respect to employee voice include:
1. Works councils and employee representatives on company boards are only established
in companies with a certain number of employees. This means that a large portion of
the German workforce does not have access to these mechanisms for expressing their
voice.
2. While the system provides for employee representation, there is an inherent power
imbalance between labor and management, which can limit the effectiveness of
employee voice in practice. This is particularly true in situations where management
is strongly opposed to a particular proposal or request from employees.
3. The system of co-determination in Germany can be complex and bureaucratic, which
can limit its effectiveness and make it difficult for employees to fully participate and
exercise their voice.
4. The tradition of co-determination and employee representation in Germany is deeply
ingrained in the country's political and social culture, and some argue that this can
make the system resistant to change and innovation.
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