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Do Unions Hurt Business Performance?

May 15, 2009

By Patrick Emerson
Oregon Economics Blog

One of the recurring themes of the ‘problems with Detroit’ narrative is that labor became too powerful, won too many costly concessions (e.g. the jobs bank) and these concessions are now crippling and are responsible for a big part of the troubles of America’s auto companies.

A rather compelling case can be made that in this specific instance the rigidity that more and more complex union labor contracts begat hurt a company in crisis (in my view, a less compelling case can be made that it was labor that caused the crisis). But it begs the question, is this true in general?

Here is an abstract from a new NBER working paper by David Lee and Alexandre Mas:

“We estimate the effect of new unionization on firms’ equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Event-study estimates show an average union effect on the equity value of the firm equivalent to a cost of at least $40,500 per unionized worker. At the same time, point estimates from a regression-discontinuity design — comparing the stock market impact of close union election wins to close losses — are considerably smaller and close to zero. We find a negative relationship between the cumulative abnormal returns and the vote share in support of the union, allowing us to reconcile these seemingly contradictory findings. Using the magnitudes from the analysis, we calibrate a structural “median voter” model of endogenous union determination in order to conduct counterfactual policy simulations of policies that would marginally increase the ease of unionization.”

We all know that stock market performance is based on many things, however a unionized work force appears to hurt it on average, but have little effect on the margin. This is probably explained by the fact that when you are using close elections, there is little difference in the performance of firms because there is not a huge discrepancy in what the union wants and what the firm is offering. On average though, these differences might be large – and especially so through time. A very small difference in growth rates of unionized versus non unionized firms can lead to large differences over time.

A caution: this says nothing about whether such differences are welfare improving. It may be that even with slower firm growth, such a trade off is welfare improving if unionization is beneficial to workers.

By Patrick Emerson
Oregon Economics Blog

  
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