Unions and Microeconomic Performance

1
Unions and Microeconomic Performance

• Zafiris Tzannatos and Toke S. Aidt

2
Benefits of Representative Organizations

• Identify good policies to benefit the poor, who
  might otherwise not be represented in government
• Prevent corruption by giving those otherwise
  without political power an opportunity to
  influence policy-makers
• Reduce deadweight loss from policies benefiting
  represented groups

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Are these benefits true of trade unions?
These benefits may not be true of trade unions,
for two reasons

• Trade unions may pursue political objectivesfor
  example, they may attempt to use political power
  to block competitors from entering their market.
  Trade unions have also sometimes contributed to
  the demise of elected governments.
• Trade unions may foster a labor aristocracy.
  They may cease to represent the weak and turn
  into groups promoting the welfare of a few,
  powerful members at the expense of the rest of
  the economy. For example, they may promote
  restrictive practices which serve to limit the
  supply, and hence raise the price, of union work.

4
Previous Research
Most research to date finds that unions can have
either positive or negative effects on an
economy, depending on a large number of external
factors. Unions can be good or bad for
economies. But two main verdicts have emerged

• The economic effects of unions vary with the
  time and country.
• Unions have different effects based on what
  kinds of economic, institutional, and political
  conditions they operate under.
• Is the economy competitive? Is it protectionist
  or open to trade?
• What kinds of government regulations exist on the
  right of workers to organize?
• How pro-market or pro-welfare is the government?

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Efficiency
Tzannatos and Aidt focus on efficiency as one of
the main pathways by which unions may slow
economic growth.

• Allocative efficiency unions may prevent scarce
  resources from being used for the best purpose
  (e.g. wage-distortion between sectors).
• Technical efficiency unions may prevent firms
  from producing the maximum output with their
  inputs (for example, by restricting the use of
  workers for certain tasks).
• Dynamic efficiency unions may slow down
  employment creation, or reduce investment.
• Distributional efficiency unions may arbitrarily
  affect wages for no good reason. Some may get
  higher wages just for being insiders.

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Production Function Model

• Typically, to estimate the productivity effects
  of unionization empirically, researchers run
  regressions to predict labor productivity or
  total factor productivity with given inputs,
  firm/industry characteristics, and a
  union/non-union dummy variable.
• This may not be the most accurate method.
• If unions raise wages in unionized
  firms/industries, employment may be reduced and
  the marginal product of labor will increase.
• Higher union wages may cause changes in the input
  mix, creating a simultaneity problem, since
  whether a firm has a union will affect the
  right-hand variables in the regression.
• Management actions are ignored in this method.
  Since unionization affects management/employee
  relations, this method could give unions credit
  for management actions.

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Subjective productivity measurement

• Other studies have used subjective measure of
  productivity, in which employers rate their
  establishments labor productivity compared to
  other firms in the same industry.
• Obvious problems exist with this, too. The
  responses may not be reliable or accurate, and
  may be affected by unionization even if actual
  productivity is unaffected.

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Productivity level differentials in the US

• Considerable variation among studies.
• Unions seem to raise productivity levels in
  industries with high competition.
• Unions seem to raise productivity when there are
  good industrial relations (few grievances
  filed, few unresolved grievances, few
  strikes/quits).
• In industries with bad industrial relations,
  unionized workers may have less incentive to work
  harder. For example, some studies find that
  unionized workers are absent 30 more than
  non-unionized employees. So unionized
  establishments that use incentive-based
  compensation and that use joint decision-making
  between management and labor tend to have higher
  productivity levels than similar non-unionized
  establishments, and unionized establishments that
  use traditional compensation and management
  styles tend to have lower productivity levels
  than similar non-unionized establishments.

9
Productivity level differentials in the UK

• Tentative, non-robust conclusion UK unions
  decrease productivity levels.
• The results are affected by what measure of
  unionism is usede.g., union density (negative
  effect) vs. strikes (no effect/positive effect).
• In competitive industries, there seems to be
  little effect of unionization. Only when there
  are few product competitors do we see
  statistically significant negative productivity
  effects of unions.
• The productivity effect of unions varies over
  time.
• Pre-1979 no negative effects
• Beginning in 1980s, negative effects are seen
• By late 1990s, according to recent subjective
  productivity measurements, only industries with
  multiple, separately bargaining unions have
  negative productivity effects. For
  establishments with one union or with multiple
  unions that bargain together, there are no
  negative effects.

10
Productivity level differentials in Japan

• Some studies find that productivity was boosted
  by unions in the 1970s (Muramatsu, 1984). Others
  find that productivity was 15 lower in unionized
  establishments (Brunello, 1992). This is
  confirmed by subjective measurements of
  productivity (Benson, 1994).
• Full-time union officials seem to have a positive
  impact on productivity.
• Other studies show that unions may have a ceteris
  paribus negative effect on productivity, but that
  unionization may indirectly increase productivity
  since unionized workers work for longer periods
  of time, reducing labor turnover.

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Productivity level differentials in Germany

• Unions seem to have a small negative effect on
  productivity.
• German firms have work councils that represent
  workers, even in non-unionized firms, so this may
  have hidden some positive effects of unionization
  resulting from the representation of workers
  (evidence on the impact of work councils shows a
  positive effect on productivity, though only in
  larger firms).

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More evidence based on productivity differentials

• Unions had no impact on productivity in Korea,
  but mandatory works councils (similar to Germany)
  had positive impact.
• Australia and Canada, limited evidence shows
  negative effect of unionization.
• Study on Malaysia found that unionized firms have
  higher productivity levels.
• Study on nine Latin American countries found that
  unionization had both positive and negative
  effects, depending on the industry and time
  period.

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Productivity growth differentials

• In US, unionization may have slowed productivity
  in certain cases, but not significantly overall.
• In UK, though unions seem to have had negative
  effect on productivity levels during the 1980s,
  there is mixed evidence on the effect of
  unionization on productivity growth. Some
  studies show benefits of unionization on
  productivity growth. Others show no effect.
• Tzannatos and Aidt believe that it is unlikely
  that productivity growth differentials could
  exist for long, since that would mean a forever
  expanding gap between unionized and non-unionized
  workplaces. If productivity growth differentials
  do exist, they are probably short term.

14
Unions and Technology

• Theory is ambiguous. Unions may look at short
  term and decide to oppose implementation of
  technological advances, or they may look at
  long-run and decide that productivity-boosting
  technology will be beneficial.
• Empirical evidence suggests no effect of
  unionization on the adoption of new technology.
  One study found no effect on the adoption of
  numerically controlled machine tools in the US.
  Another found a small positive influence of
  unions on the adoption of microelectronic
  equipment in the UK in the mid-1980s. A third
  found a positive influence of unions on the
  adoption of technological changes.
• In general, studies show no significant effects
  of unions on technology adoption.

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Unions, Investment, and RD

• In theory, unions may demand that profits be used
  to boost wages rather than be invested in
  physical capital or RD. Its also possible that
  increased labor costs associated with unions will
  result in firms substituting away from labor and
  into physical capital and RD.
• Empirical evidence in US, Canada, UK, and Germany
  suggests a negative effect of unions on
  investment. This effect is reduced as union
  density increases.
• Evidence suggests a negative effect of
  unionization on RD in UK, US, Canada, and
  Germany, but a positive effect of unionization of
  RD in Japan.

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Unions and Human Capital

• Theory suggests that unions should have a
  positive effect on human capital accumulation
• Empirical evidence shows clear positive effects
  of unionization on human capital acquisition in
  UK. Unionized workers receive more training and
  do better after the training than non-unionized
  workers.
• US evidence is mixedsome studies find positive
  effects of unionization, but others find no
  differences in specific skills (computer
  literacy, numeracy, or skills training).
• By changing relative wages, unions could also
  theoretically affect human capital formation by
  increasing relative wages for unskilled workers
  and thereby decreasing the returns to education
  or skill formation. However, firms facing higher
  wages for unskilled workers will substitute away
  from these workers, giving potential employees an
  incentive to seek education to avoid being
  unemployed.

• Unions may demand more training for workers.
• Since unions are associated with lower turnover,
  employees may be more inclined to seek
  job-specific training.

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Unions and Profit

• Typically, unions are seen as decreasing a firms
  profitability, since they redistribute profits to
  their members. However, this effect may be
  mitigated or eliminated if unionization boosts
  profits. In other words, unions might not just
  take a larger slice of the firms piethey may
  expand the pie first.
• Studies from the US, the UK, Japan, and Korea
  suggest that financial performance was better in
  non-unionized than unionized firms in the 1980s
  and early 1990s. The effect was stronger for
  firms with monopoly power, and unions sometimes
  appropriated 47-77 of monopoly profits.
• However, studies of the late 1990s suggest the
  opposite effectunions may have had a positive
  effect on profitsor no effect at all. One
  studied entrepreneurial firms in the US and found
  that unionized firms performed better
  financially. UK studies based on subjective
  measures of performance have found no negative
  effects of unions.

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Unions and Profit (continued)

• Unions still have vastly different impacts in
  different firms or industries.
• Multiple unions that bargain separately are
  associated with lower firm profitability.
• Unions in firms/industries that face little
  competition have negative impacts, while unions
  in firms/industries that face more product
  competition have little effect.
• Tzannatos and Aidt argue that, recently, more of
  a firms monopoly rents are part of the value of
  the firm itself, not yearly profits. For
  example, an innovative company that is expected
  to be profitable will have a high rate of return
  on its shares. Some of the monopoly rents, then,
  are gained through capital gains determined
  through the market in expectation of future
  profits. These rents cant be given to a firms
  workforce. They believe this explains much of
  the decrease in the negative effects of
  unionization on financial performance.

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Unions and Economy-Wide Efficiency Costs

• Typically, when unions gain benefits for their
  members, they are seen as imposing costs on the
  rest of society. They seek narrow objectives
  that give benefits to their members or reduce
  competition, which tends to displace workers from
  unionized to non-unionized sectors.
• Empirically, the deadweight loss has been
  estimated in the US and Australia. The two
  countries had similar deadweight losses (lt0.5 in
  the US) though they had large differences in
  unionization (80 unionized in Australia vs. 15
  in the US).

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Unions and Economy-Wide Efficiency Mitigating
Costs?

• Unions may decrease information imbalances in the
  economy at large. For example, they may inform
  potential workers about dangers associated with a
  particular firm or industry. Ordinarily, the
  firms would not have to compensate workers for
  the hidden risks, leading to an inefficient
  allocation of labor.
• In a study in Mexico, the effect for workers of
  correcting this imbalance was estimated at 0.5
  of GDP per year. The economy-wide effect was
  estimated to be about 0.6 of GDP per year.

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Unions and Economy-Wide Efficiency Unions
Choices

• Unions can decide whether and to what degree to
  they want to be rent-seekers and advocate
  political change or provide agency services to
  reduce workplace inefficiencies. One path takes
  currently existing wealth and allocates a greater
  share to those the union represents. The other
  makes the firm more profitable and gives the same
  share to the unions members.
• Unions will base their decisions on market
  conditions.
• If conditions are competitive, a union will not
  find it as beneficial to spend resources
  attempting to get a larger share of the small
  monopoly rents, and may choose to focus more on
  agency services that expand rents.
• If an industrys labor relations are more
  regulated, a union will have increased bargaining
  power and will not need to use as many resources
  to gain the same share of the pie. They may
  then focus more on providing agency services that
  expand the pie.
• Empirically, a study of utility companies in the
  UK showed that, when the companies were
  privatized and hence faced a highly competitive
  market, unions changed their focus from conflict
  (taking more of the pie) to cooperation
  (increasing the pies size).

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ConclusionUnions have ambiguous effects.

• External factors determine whether unions are
  detrimental or beneficial to society. For
  example, if markets are competitive and flexible,
  unions may be beneficial. In industries with
  high monopoly rents, however, unions may have
  negative effects on the economy at large.
• Government and employers have an important role
  to play. They can change the external conditions
  which help determine whether unions are
  beneficial or harmful.
• Properly handled, unions can be beneficial for
  companies profits and the economy at large.

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Discussion Questions

• Tzannatos and Aidt argue that competitive markets
  will reduce the benefits of rent extraction, so
  unions will substitute towards rent creation.
  They also argue that deregulation increases the
  cost of rent extraction by decreasing a unions
  bargaining power, so unions will shift their
  resources towards rent extraction in order to
  maintain their share. Arent these two stories
  similar? In both cases, the marginal benefit of
  a dollar spent on rent extraction has decreased.
  Why do Tzannatos and Aidt believe there will be
  different effects?
• Were you satisfied with the authors handling of
  the difficulties in measuring productivity (e.g.,
  increasing wages in unionized firms automatically
  increases the MP)?
• Does this paper have implications for long-term
  growth?
• Do you accept the authors contention that unions
  will make rational allocative decisions between
  rent extraction and rent creation?
• One problem with unions mentioned in the paper is
  their propensity to seek their ends through
  government means. Does this pose a problem for
  Tzannatos and Aidt when they argue that external
  factors shape the face of the union? For
  example, though competitive markets make for a
  more productive union, unions may use democratic
  means to control their market and make it less
  competitive.