Using data from the Hannover Firm Panel, we evaluate the German Co-determination Commission's position that the steady erosion of institutionalized employee participation is unacceptable. We report that the economic impact of works councils on various indicators of firm performance is not such as to inspire confidence in the efficacy of this indirect form of participation. From an economic perspective, therefore, there is no need for new laws facilitating works council formation or even making them compulsory. Furthermore, the co-determinationfree zone is not to be equated with an absence of participation, since many firms embrace teamworking and other forms of direct employee involvement. This may prove more effective than indirect participation via the works council alone.