Corporate Social Responsibility (CSR) activities of companies can extend to many areas: the environment, the supply chain, production locations or employees. CSR activities often have a direct negative impact on profits because, for example, production costs increase. In return, consumers or employees can respond to CSR activities with an increased willingness to pay or a higher level of work effort. If the second effect is strong enough, it can offset the increase in production costs and CSR activities can raise profits.
However, if CSR activities are not directly observable, companies have the incentive to claim to have undertaken them without actually having done so. In this way, they can realize the additional profit through CSR on the one hand, whilst on the other hand avoiding higher production costs. A new paper by Laszlo Goerke (University of Trier and IAAEU) and Nora Paulus (formerly also IAAEU Trier, now University of Luxembourg), which has just been published in the Canadian Journal of Economics, is based on this idea. Goerke and Paulus assume that a company improves the employment conditions of its employees and that they are prepared to accept a reduction in wages in exchange for the improvement. However, once the wage reduction has been agreed upon, the company has no incentive to implement the improvement. Changes in working conditions laid down in a collective bargaining agreement will be very costly not to realize. This is the case because the union can respond to such a breach of contract by the company with strikes and legal actions. These sanctions are not available to individual employees. As a result, CSR activities agreed upon in collective agreements are more likely to be implemented than if a company introduces them unilaterally, because the credibility problem can be overcome through collective agreements.
The main insight of the analysis by Goerke and Paulus is that collective bargaining, which includes not only wages but also CSR elements, can lead to both a better situation for employees and an increase in profits. The two authors suspect that co-determination at the establishment level in Germany can have similar, positive effects because works councils also have an incentive to implement CSR activities for the benefit of employees. However, the positive effect of collective agreements only occurs if the CSR activities benefit employees. If, for example, environmental aspects are affected, employees have little incentive to insist on the implementation unless they profit directly. In this case, collectively negotiated CSR activities may increase entrepreneurial incentives for Green-washing, i.e. the attempt to give oneself a sustainable image without implementing corresponding CSR activities in operational business.
Laszlo Goerke und Nora Paulus (2024), Collective Bargaining about Corporate Social Responsibility, Canadian Journal of Economic (doi: 10.1111/caje.12736)
However, if CSR activities are not directly observable, companies have the incentive to claim to have undertaken them without actually having done so. In this way, they can realize the additional profit through CSR on the one hand, whilst on the other hand avoiding higher production costs. A new paper by Laszlo Goerke (University of Trier and IAAEU) and Nora Paulus (formerly also IAAEU Trier, now University of Luxembourg), which has just been published in the Canadian Journal of Economics, is based on this idea. Goerke and Paulus assume that a company improves the employment conditions of its employees and that they are prepared to accept a reduction in wages in exchange for the improvement. However, once the wage reduction has been agreed upon, the company has no incentive to implement the improvement. Changes in working conditions laid down in a collective bargaining agreement will be very costly not to realize. This is the case because the union can respond to such a breach of contract by the company with strikes and legal actions. These sanctions are not available to individual employees. As a result, CSR activities agreed upon in collective agreements are more likely to be implemented than if a company introduces them unilaterally, because the credibility problem can be overcome through collective agreements.
The main insight of the analysis by Goerke and Paulus is that collective bargaining, which includes not only wages but also CSR elements, can lead to both a better situation for employees and an increase in profits. The two authors suspect that co-determination at the establishment level in Germany can have similar, positive effects because works councils also have an incentive to implement CSR activities for the benefit of employees. However, the positive effect of collective agreements only occurs if the CSR activities benefit employees. If, for example, environmental aspects are affected, employees have little incentive to insist on the implementation unless they profit directly. In this case, collectively negotiated CSR activities may increase entrepreneurial incentives for Green-washing, i.e. the attempt to give oneself a sustainable image without implementing corresponding CSR activities in operational business.
Laszlo Goerke und Nora Paulus (2024), Collective Bargaining about Corporate Social Responsibility, Canadian Journal of Economic (doi: 10.1111/caje.12736)
