Corporate Hierarchies and Labor Institutions

This paper analyzes whether labor institutions affect the design of firm hierarchies. We rationalize the role of workplace employee representation (ER) within an otherwise standard knowledgebased model of hierarchies as developed by Garicano (2000), where the firm’s optimal choice of hierarchical layers depends on the trade-off between communication and knowledge acquisition costs. To explore the empirical validity of our framework, we rely on establishment-level data on a sample of more than 18000 private-sector workplaces in Europe. We uncover a set of novel descriptive facts regarding the structure and change in corporate hierarchies under the presence of employee representatives. In particular, ER is positively correlated with the depth of hierarchy (number of vertical layers), while there is no significant association between ER and delayering. These relationships appear to be mediated by firm size. We also document that delayering does not translate into greater worker empowerment, although the presence of ER reduces the probability of functional centralization among delayered establishments. Moreover, the presence of ER correlates with the frequency of staff meetings and the accumulation of noncodifiable productive knowledge through job training and skill development. The analysis of managers’ perceptions suggests the higher frequency of meetings in firms with ER does not lead to more delays in the implementation of organizational changes. Taken together, our findings indicate that the effect of ER on the firm hierarchy is driven by a reduction in communication costs rather by an increase in knowledge acquisition costs, facilitating the flow of information to top decision makers possibly through skip-level reporting.