The wrong way to empower workers

VW Beetle
Volkswagen: kind to workers, but still a cheat

Labour’s plans to put staff on boards and give them shares are well meaning but flawed.

Staff should be represented on the board. Dividends should be split between workers and shareholders. Every company should have schemes to pay people in shares as well as a salary. At the Labour Party conference this week, John McDonnell, the shadow chancellor, set out radical plans to turn workers into shareholders. Right across the developed world, politicians are getting more and more interested in some form of workers’ representation. In this country, the Labour Party is now jumping on that bandwagon. It would make companies with more than 250 staff put aside 10% of their equity over the course of a decade to share with their employees.

Flaws in the fiddly plan

The actual details, as you might expect from a far-left, interventionist shadow chancellor such as John McDonnell, are very fiddly. The equity would come in the form of special shares that can’t be traded, and dividends capped at £500 per person – with anything above that going to the Treasury in a special tax. But why cap dividends at £500 per person, for example, unless it is to increase the amount the government can rake off in taxes? Surely it will only reduce incentives as that sum draws closer? There isn’t much point in working extra hard to get your dividend up from £490 to £500. Making it compulsory only for firms above 250 staff probably means we will end up with lots and lots of companies with 249 people on the payroll. And why can’t the shares be traded?

After all, the main point of equities is that you can buy and sell them, and they have a capital value that appreciates over time – but if you can’t trade them, presumably they won’t have any value. Nevertheless, Labour’s scheme is clearly a radical attempt to democratise a capitalist, free-market system that suffers from dwindling levels of public support. Ever since the financial crash of 2008, wages have stagnated and an overpaid corporate elite appears to take all the rewards for itself.

Despite that, however, giving more power to the workers is not a magic solution. There is very little evidence to suggest that it makes any real difference to productivity and performance. It works reasonably well in Germany, but it has a long history in that country, and the supervisory boards that workers sit on only have limited powers. They don’t actually own or run the business. It has been tried across much of Scandinavia without having any huge impact. Nor does it seem to make companies behave more responsibly. Volkswagen has an impeccable record on labour representation, but it was still caught cheating on diesel emissions.

In fact, the industries with the best record of profit-sharing with their employees are hedge funds and investment banks, with bonuses that consume most of the profits. But they are hardly the most ethical companies in the world, or the ones with the most loyal staff. It is hard to see finance as a business model we want the rest of the economy to emulate.

Tax cuts and deregulation help staff more

There are a few worker-controlled companies such as John Lewis that have been hugely successful over the years, although even it now seems to be faltering. But they remain the exception. If they were really so superior then presumably workers’ co-operatives would already have taken over – there has never been anything to stop them being set up.

Tax incentives for share schemes make sense precisely because they are voluntary. Companies can take them up if they want to, and so can the staff. But there is no case for compulsory schemes. The truly effective form of “worker power” is the ability to move from one job to another. For that, what we need is full employment and rising wages. If you don’t like your boss, you can simply go and work for someone else for more money. And the best way to achieve that is through tax cuts and deregulation – not yet more meddlesome state intervention.