Consistently with the empirical evidence and in contrast with Shapiro & Stiglitz (1984), we demonstrate that worker owned firms exhibit not only more wage flexibility and less employment volatility than investor owned firms, but also lower expected wages than the latter. This is due to the informational advantage enjoyed by the firm’s owners relatively to the workers concerning some circumstances that affect the performance of the firm. We show this both in the case in which each investor owned firm offers labor contracts to single workers who act atomistically and in the case in which each investor owned firm negotiates labor conditions with its workers who act as a group (a “union”). Finally, we show that differences in attitudes towards risk between investor owned firms and their workers are not necessary to explain the typical combination of state-independent wages and cyclical layoffs that characterizes most industries.

Key words: labor demand uncertainty, wage flexibility, labor contracts, asymmetric information, employment volatility, worker co-operatives.

JEL codes: D21, D86, J33, J41, J54.