“Equilibrium unemployment and wage setting in worker owned enterprises”

The Ward (1958) model was introduced to study the behavior of worker co-operatives in a former Yuguslav-type economic environment. It assumes average labor income maximization as the objective per worker-member in co-operatives. Since members are entrepreneurs and control strategic and distributive decisions, they appropriate the whole value added (net of the cost of capital). When competition is not perfect (pure profits are positive), members in co-operatives obtain a higher income relative to employees in investor owned companies, since they appropriate the competitive equilibrium amount of labor remuneration plus a share of pure profits. The Shapiro and Stiglitz (1984) model on unemployment as worker discipline device shows that worker owned firms (WOFs) can achieve the Pareto optimal level of equilibrium unemployment since, when the owners coincide with the workers employed by the organization, the equilibrium level of unemployment is lower and wages are higher than in investor owned companies. The macroeconomic equilibrium presented by Shapiro and Stiglitz in the presence of WOFs corresponds to the implications of the Ward-Domar-Vanek- model. In the paper we present a more general model in which the macroeconomic equilibrium level of wages in the presence of WOFs can be both higher and lower than the economy wide level, contrary to the Shapiro and Stiglitz prediction