Employee-ownership is a misguided policy

Proposals for worker ownership of firms have gained steam across the global left, from Bernie Sanders’ long-time advocacy to Jeremy Corbyn’s promotion of it in the Labour party’s latest manifesto. Although fitting with the broader left-wing theme of workers taking control of the means of production, such proposals are misguided.

Wages should not be determined by the success of the particular firm at which someone is employed. Instead they should be driven by the overall market’s supply and demand for the services being provided. In this way, labor is like any other business input. How bizarre would it be for a tire manufacturer to pay its rubber supplier based on how well the tires sell?

While the idea of workers sharing in their employer’s upside sounds good, these proposals expose employees to downside risk as well. Someone stocking the shelves at a struggling Sears store should not be paid substantially less than someone performing the same role at the more successful Target.

Likewise, some industries are inherently more profitable than others. An accountant at a high-margin pharmaceutical firm should not necessarily make more than someone performing the same role at a lower-profit manufacturer.

Given the ownership stake would likely be paid in lieu of higher cash wages, workers would also be heavily overexposed to the performance of their own firm. Workers should instead receive cash that they can invest in a diversified portfolio or other investments they find valuable, such as further education.

There are instances where employee-ownership or variable bonuses make sense (e.g. sales or executive management), but employers should decide the most effective motivational structure for their employees.

Worker-ownership proposals would also drive higher-quality employees to successful firms. Struggling firms would not be able to attract the talent needed to turn their performance around.

There are better ways to improve the economic well-being of workers, including perhaps unionization to negotiate better wages (in the same way a large supplier can negotiate better pricing). Employee-ownership is an attractive campaign slogan, but it’s not the right policy.