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Economics of participation is an umbrella term spanning the economic analysis of worker cooperatives, labor managed firms, profit sharing, gain sharing, employee ownership, employee stock ownership plans, works councils, codetermination, and other programs and policies by which employees participate in decision making and/or financial results in firms.

History
Economics of participation is fundamentally derived from the concept of an employee's involvement in, and contribution to, the operational and managerial functions of their workplace. This foundational concept dates to as early as 1733, when President Benjamin Franklin applied a form of employee ownership to the establishment of print shops during the founding of the United States. In exchange for a third of each shop's profits, Franklin covered the costs of each shop's upfront capital in addition to a third of operating expenses. After six years, he transferred the stores' ownership to various journeymen, "most of [whom] did well" and who were able to "go on working for themselves" successfully, among the first of all employee-owners.

Then, during the 1970s, the USA's first profit-sharing plan was initiated into Pensylvanian glassworks factories by Secretary of the Treasurer Albert Gallatin, where a fixed proportion of company profits were redistributed to employees as bonuses for exceeding output targets. Though Gallatin did not explicitly label this form of remuneration as 'profit sharing', the concept common to economics of participation was apparent nonetheless.

Industrial Revolution & 20th Century
Economics of participation emerged more formally during the USA's shift towards an industrial economy. The directors of large companies, for example Procter & Gamble and Sears & Roebuck, wanted to provide their staff with income during retirement, as financial support during employees' post-working lives. To achieve this without deteriorating firm profitability, these directors decided to award employees ownership in exchange for production effort while still employed: those who achieved set targets were allocated company stock upon retirement. In 1956, the first employee stock ownership plan was created by Louis O. Kelso, a lawyer and economist from San Francisco, to transfer ownership of Peninsula Newspapers, Inc. from two elderly founders to the company's employees. During the late nineteenth century, General Foods and Pillsbury were among the first companies to formally initiate profit-sharing bonuses: select percentages of firm profits were reallocated to staff when they exceeded sales targets. Later, in 1916, Harris Trust and Savings Bank of Chicago created the first profit-sharing pension plan, drawing upon the example set by Proctor & Gamble to ensure loyal, motivated staff received financial aid during retirement. Resultantly, the concept of profit-sharing was more widely used to the point where, during the Second World War, select employers applied it to provide necessary financial aid to staff without raising wages numerically. The notion that profit-sharing balances employees' financial security with their firm's need for increased profitability thus emerged.

Worker cooperatives, another key tool used for economics of participation, gained momentum as part of the labour movement. During the Industrial Revolution, once-workers more frequently began to assume managerial and directorial roles as a "critical reaction to industrial capitalism and the excesses of the Industrial Revolution." Worker cooperatives emerged rapidly, to combat "insecurities of wage labour" by establishing and operating employee-owned firms that provided fair wages, most prominently in the cotton mills of New Lanark, Scotland. Dr William King, a pioneer in the field of economics of participation, founded a monthly periodical titled The Co-operator in 1828, which many sourced for advice on inaugurating their own worker cooperative.

Contemporary applications
While traditional uses of economics of participation primarily aimed to increase firm profitability, modern applications are often justified by their capacity to improved corporate culture, morale and staff satisfaction. Companies such as Huawei and Publix Super Markets have implemented a combination of employee ownership and profit-sharing plans as tools for economics of participation, doing so to more closely align their staff with the goals, objectives and policies of their corporate vision rather than boost financial return. For instance, the aggregate yearly value of Huawei's employee remuneration, including profit-sharing plans and stock ownership, is 2.8 times the firm's annual net profit. This firm, along with many 21st Century others, applies tools for economics of participation to improve organisational culture and reinforce positive worker behaviours.

More recently, economics of participation tools, particularly profit sharing and employee ownership, have been applied as strategic responses to pandemic-induced economic downturn. The table below shows results from a 2021 study comparing the effects of COVID-19 on employee-owned and non employee-owned firms: significant differences in total employment, pay cuts and hour cuts were observed. Owing to their benefits for worker motivation, loyalty, career security and income stability, many economists predict tools for economics of participation are likely to become more frequent responses to downswings in economic activity.

Characteristics and tools
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Benefits for firms, employees and society
By allowing employees to participate in organisational decision-making, businesses reinforce a corporate culture framed around self-ownership, accountability, shared values and secure employment. In turn, this culture generates financial and non-financial benefits for staff, firm profitability and the wider economy.

Benefits for the firm
The application of economics of participation to business decision making more strongly identifies individual staff members with the values and culture of their workplace. The resulting increase in motivational outcomes stimulates gains to productivity, which improve total output, revenues and growth. An early study introducing employee-ownership into forty-five firms recorded a 3.84 percentage point increase in employment growth and a 3.51 percentage point increase in sales growth after this tool for economics of participation was implemented. Subsequent studies have confirmed the positive effects of worker participation on business output, concluding that this practice generally stimulates "increased productivity reinforced by increased participation”.

Moreover, tools such as profit-sharing or employee stock ownership may reduce shirking behaviours in staff as it is in workers’ best interest to maximise their output for increased pay. Hence, businesses may be able to reduce their supervision personnel and the expenses associated with these staff members’ wages. In addition, the Substitution argument is enabled by economics of participation, whereby firms use tools such as profit-sharing or ESOPs to substitute fixed pay (i.e. wages and salaries) for variable remuneration. By doing so, a business’s cost of human capital is more closely aligned with its ability to award financial compensation: the firm is thus provided with greater flexibility to adjust wages according to prevailing economic conditions.  For example, a decrease in profit-shared wages during an economic recession may mitigate the impact of reduced output and revenues on business profitability, enabling firms to retain workers at a lower cost rather than retrenching them. As such, economics of participation can improve job security for staff, while guarding firm profits against unforeseen economic misfortune.

Benefits for the employee
Tools for economics of participation often aim to increase business output and productivity. As these increased levels of output are directly correlated to higher profit portions for staff, employees also receive the benefit of voluntarily increasing their remuneration so that efficiency wages may be awarded. These above-market wages are made financially feasible by the gains derived from increased productivity, whereby a firm’s initial investment into its human capital enables economic rent to be shared, via profit-sharing mechanisms or wage redistribution.

Furthermore, when an increased number of employees adopt managerial roles within a firm or a worker cooperative, a flatter organisational structure arises. Hence, staff are allowed to participate "at the highest level" through member-driven participation, for example through open-led meetings and consensus decision-making. . Often, this is facilitated through training in public speaking and small-group debate opportunities, which develop staff members' communication abilities and equip them with skills vital to labour participation. . By fulfilling these managerial functions, workers develop transferrable soft skills in communication and responsibility that increase chances of future employment and career development.

Benefits for society
Methods to encourage economics of participation are heavily reliant on the concept of economic democracy, and thereby advocate for the transfer of decision-making power from managers and directors to public stakeholders, among which are workers. In the first instance, the implementation of employee ownership can privatise a firm and encourage economic reform, which encourages a more equal distribution of resources and economic growth. The economics of participation can also be applied on a microeconomic scale: for example, a centrally planned economy which includes state-owned factors of production can distribute revenue made from the use of each resource to workers involved in its production. This makeshift use of 'profit sharing' enables manual labourers retain their capitalistic motivations to produce efficiently, while the state maintains a majority share of ownership over the factors of production.

In addition, the economics of employee ownership recognise its ability to "anchor capital", or fix resources in local production and development. Resultantly, domestic employment opportunities are increased as jobs are maintained and added, which increase consumer incomes $$(Y)$$. As levels of income increase, consumers gain greater confidence and consumption rises, finally increasing aggregate demand $$AD = C + I + G + (X-M)$$.

https://www.emerald.com/insight/content/doi/10.1108/eb028124/full/pdf?title=employee-stock-ownership-plans-popularity-productivity-and-prospects

Research indicates that employee-owned firms – also known as shared capital organizations, in which employees hold some percentage of ownership – appear to strengthen businesses, increase the mutuality of interests, share wealth more broadly, and create a more productive and invested workforce than in traditionally organized firms (Guery, 2015). A

https://www.emerald.com/insight/content/doi/10.1108/S0885-333920180000018005/full/pdf?title=structuring-firms-to-benefit-low-income-workers-an-employee-ownership-case-study page 5

https://www.emerald.com/insight/content/doi/10.1108/JPEO-05-2020-0014/full/pdf?title=employee-participation-job-quality-and-inequality

Limitations for firms, employees and society
section summary text

https://www.emerald.com/insight/content/doi/10.1108/JPEO-08-2021-0003/full/pdf?title=employee-ownership-pros-and-cons-a-review p16 onwards

Limitations for the firm
https://www.emerald.com/insight/content/doi/10.1108/eb028124/full/pdf?title=employee-stock-ownership-plans-popularity-productivity-and-prospects page 3


 * Where the share price of the company’s shares does not increase and the employee feels they have no control over the share price outcome, then it can affect morale and retention;
 * There are costs associated with establishment and administration of the ESOP;
 * Share Ownership, specifically option plans can be dilutive – i.e as more shares are issued each share you own becomes a smaller percentage of the company.

Limitations for the employee
But tellingly, cautionary notes were sounded by those employees surveyed - 96% stated that profit sharing should not be seen as a substitute for adequate wages or salaries, and 42% agreed on disappointment or bitterness when profits go down. Additionally, only 57% felt they had a good knowledge of how their scheme worked, with 40% unaware of or unable to understand the company's literature. In one firm, the latter figure was 70%. https://www.emerald.com/insight/content/doi/10.1108/09544789210034635/full/pdf?title=profiting-from-commitment


 * The employee has all their eggs in one basket. Essentially the employee is over exposed to the company’s shares, so if the company does not perform or worse goes into administration the employees investment is lost (this problem can be minimised by limiting the amount of salary or shares that the employee can buy);
 * The share price can decrease and this can impact the value of the holding for an employee;
 * The employee does not feel they can influence the share price or performance measures and as a result the plan has no value for them.

https://core.ac.uk/download/pdf/6294741.pdf p 18

Limitations for society
insert text

https://journals.sagepub.com/doi/10.1177/088541229100600102

Contributing scholars, publications and organisations

 * Gregory Dow
 * David Ellerman
 * Derek C. Jones
 * Takao Kato
 * James Meade
 * Jaroslav Vanek


 * Journal of Participation and Employee Ownership
 * Advances in the Economic Analysis of Participatory and Labor Managed Firms
 * Annals of Public and Cooperative Economics
 * Economic Analysis (journal)
 * Economic and Industrial Democracy
 * Journal of Comparative Economics

International Association for the Economics of Participation