Employee Representation and Flexible Working Time: Identification Through a Size-contingent European Directive

Abstract: This paper provides evidence on the effect of employee representation on working time flexibility in private-sector European establishments. The empirical analysis is based on repeated cross-section establishment-level data from the last three waves of the European Company Survey. Identification rests on quasi-experimental variation in employee representation driven by the transposition of a size-contingent EU directive granting information, consultation and representation rights to employees in four countries (Cyprus, Ireland, Poland, and UK) with no previous legislation on the subject. Difference-in-difference estimates suggest that the directive had a significantly positive effect on both employee representation and the utilisation of flexible working time for eligible establishments. The greater use of flexible working time is driven by establishments with a high proportion of female workers and in which no local wage-negotiations take place. Our results are consistent with the idea that employee representation provides an endogenous rule-enforcement mechanism in second-best scenarios in which incomplete contracting problems are pervasive and third-party arbitration is unfeasible. Quite paradoxically, the relaxation of shareholders' property rights and the imposed limits on managerial discretion, resulting from the operation of employee representative institutions, seem necessary to achieve certain valuable forms of organisational flexibility in market economies.