NCPA - National Center for Policy Analysis

Working Through Employee Ownership

December 9, 2002

The imminent bankruptcy of United Airlines (UAL) may be the final blow to an idea that once entranced both liberals and conservatives - employee ownership. But as UAL, an employee-owned company, demonstrates, it works a lot better in theory than practice.

Part of the problem has been employee stock ownership plans (ESOPs). At UAL, workers have owned a majority of the stock since 1994 - with half of that owned by the pilots.

  • Economists looking at ESOPs generally find there is no significant increase in productivity at companies with such plans -- and the benefits to each individual worker are too small to fundamentally change their attitudes.
  • On the contrary, they often use their ownership to block productivity-enhancing changes, with the result that management is even more hamstrung than before, leading to losses and bankruptcies.
  • A Dec. 4 report in The Washington Post looks at the experience of China with employee ownership, which the government strongly encouraged. Workers there proved unwilling to make radical changes, blocked layoffs, slacked off from work and often abused corporate assets -- while at the Jing Wine Company, for example, workers apparently drank much of the profits.

There do not appear to be any microeconomic foundations to back up claims that employee ownership of large corporations is good for the economy, says economist Martin Sullivan. In fact, there are many reasons for economists to believe employee ownership just causes problems.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 9, 2002.


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