====================================================================== Community Economics Newsletter Center for Community Economic Development University of Wisconsin-Madison No. 238 August 1996 ====================================================================== STIMULATION OF ECONOMIC DEVELOPMENT THROUGH WORKERS COOPERATIVES by Carla Dickstein 1/ Since the mid-1970s, interest in worker cooperatives and other forms of employee ownership has grown in North America and Europe. Cooperatives have special characteristics that are particularly well suited to the rural context and deserve consideration for rural enterprise development. Worker cooperatives are firms controlled by their members, who are workers. Despite some divergences, the following basic cooperative principles applied to worker cooperatives. First, membership is open and voluntary. Second, there is democratic control at all levels of the enterprise based on one member, one vote. Third, interest paid on share capital is limited. Fourth, workers share in any profits, usually in proportion to their work contribution. Fifth, some part of the cooperative's profits is devoted to worker education. And sixth, cooperatives cooperate among themselves. If a worker cooperative is consistent with these principles, then its success depends on operating an economically viable and democratically-managed business in which workers have the knowledge and capacity to participate in the decision-making process and ultimate control of the cooperative. It is apparent from this definition that cooperatives differ fundamentally from private firms. Control of the firm is based on personal rights derived from a workers's labor contribution rather than on property rights derived from a capital contribution. Cooperatives also differ from employee-owned firms, such as firms with an employee stock ownerships plan (ESOP). The membership right in an ESOP is based on share ownership and not on the functional labor role in the company. ESOPs have been established primarily for tax advantages, without creating widespread employee ownership. Many ESOPs systematically have excluded lower- and middle-paid employees. Only a handful of "democratic ESOPs" give workers full control of the firm and comply with the above definition of a worker cooperative. Because cooperatives are worker-controlled rather than corporate or absentee-owner controlled, it is more likely the business will stay where the workers live. Cooperatives have been used successfully as a defensive strategy to buy out closing businesses and retain jobs in the community. Companies that have been mismanaged or unable to pay the high returns required by corporate interests may be sufficiently profitable for the workers to maintain and secure their jobs. Cooperatives also provide greater flexibility for job retention during recessionary periods. Labor is considered a fixed rather than a variable cost over the short run in cooperatives although labor costs can be manipulated over the long run. Members can decide to reduce hours or wages and spread the work among themselves to provide job security. When cooperatives are structured properly and have sufficient production inputs, they have been known to increase productivity and provide better job quality. Greater worker participation in decision making is generally thought to improve business performance by increasing worker motivation, job satisfaction, and personal dignity and eliminating conflict between labor and management. Cooperatives improve job quality mainly by increasing the job responsibility of their members and developing self-management skills. The greatest difficulty cooperatives face is attracting and retaining talented entrepreneurs and managers. Shared control and limited rewards make cooperatives less desirable to most entrepreneurs unless they are committed ideologically to cooperatives. A second problem is raising sufficient capital. Conventional financial institutions are commonly unwilling to lend to cooperatives either because of outright bias or because unfamiliarity with cooperative structures makes it difficult for them to under-write loans. Economic crisis, rather than ideology, has been the key catalyst for worker cooperative formation. Cooperatives have developed more extensively in areas with some history of operating cooperative structures and/or a cooperative or socialist ideology. Government support -- in the form of grants, favorable terms for borrowing capital, favorable taxation policies, preferential treatment in awarding government contracts, and establishment of barriers to outside investment and trade -- has been important in sheltering the development of cooperatives in an otherwise hostile environment. Cooperative "degeneration" has occurred in several forms: members have sold out to nonmember shareholders for financial gain; they have barred entry to new members and hired non-member labor in order to hoard profits; or they have relinquished control to managerial elites who possess specialized technical knowledge, expertise, and leadership skills. Some of the degeneration problems can be minimized through legal structures that prohibit nonmember control and hired labor or required worker education and training for workers to gain self-confidence and business skills. However, legal structurescan be manipulated. Ultimately, if cooperatives are to remain cooperative and grow over the long term, members must also have some ideological commitment to cooperative principles. For cooperatives to take hold, the work force must have education and training. Most importantly, cooperatives must be seen as central to a community development strategy. This centrality has been frequently found in communities experiencing repression of ethnic and cultural minorities, plant closing in single industry towns, or years of exploitation in resource-based economies. Ron Shaffer Community Development Economist 1/ Abstracted from Carla Dickstein, "Stimulation of Economic Development Through Worker Cooperatives" in David W. Sears and J. Norman Reid (eds)., _Rural Development Strategics_, Chicago: Nelson-Hall Publishers, 1995, 84 - 100.