NORC at the University of Chicago Union Effects on Productivity, Profits, and Growth: Has the Long Run Arrived? Author(s): John T. Addison and Barry T. Hirsch Reviewed work(s): Source: Journal of Labor Economics, Vol. 7, No. 1 (Jan., 1989), pp. 72-105 Published by: The University of Chicago Press on behalf of the Society of Labor Economists and the NORC at the University of Chicago Stable URL: http://www.jstor.org/stable/2534990 . Accessed: 19/04/2012 18:30 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. The University of Chicago Press, Society of Labor Economists, NORC at the University of Chicago are collaborating with JSTOR to digitize, preserve and extend access to Journal of Labor Economics. http://www.jstor.org Union Effectson Productivity, Profits,and Growth:Has the Long Run Arrived? JohnT. Addison,UniversityofSouthCarolinaand Universitit Bamberg BarryT. Hirsch,University ofNorthCarolinaat Greensboro This articleinterprets literature on economic examiningunioneffects performance. Productionfunctionstudiesindicatesmalloverallunion impactson productivity; positiveeffects, wheretheyexist,appearto resultfrommanagementresponseto decreasedprofitexpectations and froma naturalselectionprocess. Lower profitability among unionizedfirmsis well established;moreinteresting is thepossibility thatunionsappropriatequasi rentsderivingfromlong-livedtangible and intangiblecapital.The connectionbetweenunions,investment behavior,and productivity growthemergesas a particularly fruitful line of empiricalinquiry,althoughit does not encouragea sanguine view of unionism'slong-runimpact. I. Introduction Controversycontinuesto surroundthe natureand directionof union effects on economicperformance. Much of theimpetusbehindthisdebate stemsfromtheworkof RichardFreemanand JamesMedoff(1984), who pointto potentialincreasesin productivity resultingfromunion-induced changesin theworkplace.Such increasesareeffected throughtheexercise We havebenefited fromthecomments of seminar and readersof participants earlier ofthepaper. versions [JournalofLaborEconomics,1989,vol. 7, no. 1] ?) 1989by The University of Chicago. All rightsreserved. .50 0734-306X/89/0701-0005$01 72 UnionEffects 73 of "collectivevoice," coupled withan appropriateinstitutional response frommanagement. Unions,itis argued,lowerturnover and establishmore inworkplacescharacterized efficient structures governance bypublicgoods, in production,and long-term complementarities contractual relations.Althoughrecentliteraturecontinuesas beforeto investigateproductivity is beinggivento an examinationofunion differentials, increasingattention on profitability, and growth. effects investment, This articleinterprets recentliterature on ecoexaminingunion effects nomicperformance. We firstaddresstheambiguitysurrounding theproductionfunctiontestitself,priorto offering an interpretation of observed productivity differences. The newerliterature examiningunioneffects on profitability is nextanalyzed.Issuesyetto be resolvedin thisarea include the magnitudeof the union profiteffect, the consistencyof union productivityand profitability estimates,and the sourcesfromwhichunions captureprofits. Finally,we turnto whatmaybe themostinteresting aspect of the literature;namely,the dynamiceffectof unions on productivity growth,investment activity,and long-runperformance. It is concluded thatthedebateoverwhatunionsdo will focusincreasingly on thelongertermconsequencesof unionrentseeking. and the ProductionFunctionTest II. Productivity MeasurementIssues The majority oftheunionproductivity studiesfollowBrownand Medoff somevariantoftheCobb-Douglasproductionfunction (1978) in employing Q = AK'(L, + cL )l-a, (1) whereQ is output,K is capital,Lamand L, are union and nonunionlabor, A is a constantof proportionality, and a and (1 - a) are the respectively, withrespectto capitaland labor.The parameter c reflects outputelasticities differences betweenunionand nonunionlabor.Ifc > 1,then productivity in line withthecollectivevoice model;if unionlaboris moreproductive, c < 1, thenunion labor is less productive,in line with conventionalargumentsconcerningthedeleteriousimpactof such thingsas unionwork rules and constraintson merit-basedwage dispersion.Manipulationof equation(1) yieldstheestimating equation(we ignoretheerrorterm) In (QIL) - In A + a In (KIL) + (1 -a) (c -1)P, (2) whereP is uniondensity(L,/L). Equation (2) assumesconstantreturnsto scale. This assumptionmay be relaxedby includinga In L variableas a measureof establishment size. The coefficient differential on P measuresthe logarithmicproductivity 74 Addison/Hirsch if it is assumedthatthe union productivity of unionizedestablishments; of labor inputs,the union efficiency effectsolelyreflectsthe differential on P effectis calculatedby dividingthe coefficient labor productivity by (1 - a). Also, to anticipatewhat follows,c > 1 impliesthatunions (TFP), as obtainsaftersubtracting have highertotalfactorproductivity a ln(K/L) frombothsidesof (2), In Q -a In K -(1 -a)ln L = TFP - In A + (1 -a)(c -1)P. (3) test.As Brown A numberoflimitations attachto theproductionfunction and Medoffthemselves noted,theuse ofvalue added as an outputmeasure confoundspriceand quantityeffects. That is, partof the measuredunion differential may resultfromhigherpricesin the unionized productivity effectstend to be sector.Not surprisingly, estimatedunion productivity are made (e.g., Allen 1984b)and are rarely lowerwhenpriceadjustments largein studieswhereQ is measuredexplicitlyin physicalunits.Union firms can moreeasilypassthroughhighercostsinproductmarketssheltered is fromnonunionand foreigncompetition.Use ofvalue added,therefore, most likelyto confoundprice and outputeffectsin aggregateanalyses uniondensity.It is less likelyto value added to industry relatingindustry analysesthatat least allow the possibilityof be a problemin firm-level controllingfora firm'sunion statusand industrydensity.A relatedposin equation(2) maycrudelybe tracking sibilityis thattheunioncoefficient wage differential.' theunion-nonunion The mostpointedcriticismleveledat theBrown-Medoff approachhas come fromMorganReynolds,who argues:"Estimatesof c are of no consequencein discoveringthe independentimpactof unionizationon probecausethereis no wayto statistically separateobservedmarginal ductivity differentials fromunion/nonunion price[wage] differentials" productivity (Reynolds 1986, pp. 445-46). He points out that if profit-maximizing firmsoperateon the labor demandcurve,theywill adjust employment such thatthe marginalvalue product,OY/OL, equals the wage. If union establishments face a higherwage, theywill lower employmentso that highermarginalvalue product.Accordingto theyhavea correspondingly Reynolds(1986,p. 445), we thuswill observe w,/Wn= (OY/OLa)/(OY/OLn)= c, (4) Itrelies tousbyGreggLewisincorrespondence. Thisargument wassuggested valueaddedis thesumofunionandnonunion ontheargument that,bydefinition, thereturn thatchiefly to ownedcapital.Follaborcostanda residual comprises ofsuchan equationyieldsa ln(Q/L) function lowingLewis,a Taylorexpansion inconjunction withlabor'ssharetimestheunion inwhichuniondensity (P) enters is thatthecoefficient on P fromeq. (2) varies The suggestion wagepremium. withtheunion-nonunion wagedifferential. directly UnionEffects 75 Rewheresubscriptsu and n denoteunion and nonunion,respectively. gardlessof whetheror not capital and labor qualityare controlledfor unionfirmsfacinghigherwage ratesmusthavea correspondstatistically, inglyhighermarginalvalue productin long-runequilibrium.The productionfunction test,accordingto Reynolds,provesonlythatunionwages are higher,not thatunionsincreaseproductivity. He is correctin statingthatfirms How valid is Reynolds'scriticism? suchthat operatingon theirlabordemandcurveswill adjustemployment OY/OL = w. Reynolds'scase, then,restson the questionof what in fact intheproductionfunction studiesand whether is measuredeconometrically settlements are locatedon labordemandcurves. unionwage-employment Because the productionfunctionstudiescontrolfor capital inputsand of thelabor laborquality,it can be arguedthattheymeasureverticalshifts demand schedule resultingfromunion productivityeffects,namely,a comparisonof unionand nonunion(OY/OL)I K. By contrast,movements along a nonshifteddemandscheduleimplya changingratioof labor to otherinputs.The productionfunctionapproach,then,need not be an effectif otherinputsin the inappropriatetestof the union productivity productionprocesscan be measuredaccurately.(Other problemsmayof But, as Brown and Medoff,as coursemake the approachinappropriate.) well as Reynolds,pointout,unionfirmsfacinghigherwage ratesmustbe moreproductiveif theyare to survivein the long run.Hence the union sample effectis not being measuredacross a representative productivity of firms.Rather,onlythoseunion firmsthathave survivedby increasing to offsethigher productivity (a shiftin thedemandschedule)sufficiently differentials ofunionproductivity unionwagesareobserved.Measurement fromamonga sampleof survivingfirmsthusoverstatesthe productivity firm.It does measurea productivity effectof unionson a representative ratherthan a wage effect, however,althoughin the long run thesetwo effects shouldtendto converge. The Reynoldscriticismmustbe further qualifiedifwage-employment outcomesarenotlocatedon thelabordemandschedule.As is well known, settlements (McDonald and on thedemandcurveare generallyinefficient offthelabordemandcurve,at lower Solow 1981). Thereexistsettlements levelsthanwould obtainthroughsequential wage and higheremployment preferred by both the union and wage and employmentdetermination, A settlement on thecontractcurve(formedbythetangencies management. and firmisoprofitcurves)requiresexplicitor of the union indifference oththat wages and employment; implicitcontracting jointlydetermines firm the could maximize short-run once a was determined, wage erwise, to thecorresponding pointon the profitability by adjustingemployment demandschedule.No staticinefficiency would resultin theeventof setto as the"strongefficiency" tlements on a verticalcontractcurve,referred case (Brown and Ashenfelter 1986). Both partiesagreeto maximizethe 76 Addison/Hirsch to ownersand laborand thenbargainoverits jointvalueof theenterprise division.Despite skepticismas to the actual union politicalmodel and offthe demand contractualmechanismsthatwould producesettlements schedule(Oswald 1984), empiricalstudiesgenerallyrejectthehypothesis outcomeson the demandscheduleand findmixed of wage-employment (Brown and settlements supportforthe hypothesisof stronglyefficient 1986;Card 1986;EbertsandStone1986;MaCurdyandPencavel Ashenfelter 1986;Svejnar1986;and Abowd 1987). offthe labor demandscheduleobtain,the link If contractsettlements relativewagesand marginalproductsis severed. betweenunion-nonunion We do know, however,thatthe marginalvalue productof union labor (measuredon the demand schedule) will be less than the union wage, whereasthetwowill be equatedin nonunionfirms(ignoringthepossibility wherebynonunionoutcomesmimicunion largethreateffects ofsufficiently outcomes).The equalitystatedbyReynoldsin equation(7) needno longer will be less than the differential hold; the union-nonunionproductivity productionfunction the of The appropriateness unionrelativewage effect. issues. on econometric rest largely to continues test,therefore, of identicalproin studies made most is the assumption Also troubling sectors and (i.e., in union nonunion the functions duction a,, = ao). Such studiesbytheabsenceofseparate in aggregate is necessitated an assumption data on the union and nonunionsectors,althoughunion densitycan be sidevariablesin aggregatemodels.Brown withotherright-hand interacted theconsequencesofrelaxingthisassumption and Medoff(1978) investigate sensitiveto assumeddifferences and findthe estimatedunion coefficient in au and ac, beingsharplylowerin mostcases.The assumptionof equivis probablylessserious-and lessnecessaryalentproductionparameters studies(see Clark1980a,1980b).In addition,estimation inindustry-specific of the productionfunctionin log-linearform,made possibleby use of a biasesupwardtheabsolutevalue approximation, first-order Taylor-series effect(Lovell, Sickles,and Warren of the estimatedunion productivity 1988). The implicationis thatexistingCobb-Douglas studieshave overstated(by an apparentlymodestdegree)both positiveand negativeestieffects. matesof unionproductivity The productionfunctiontestalso may depend cruciallyon the ability to controlaccuratelyforall inputsin theproductionprocess.Union and in the qualityof unmay differsystematically nonunionestablishments arenotindependent measuredorganizationalfactorsso that"firmeffects" of union status.For example,inputssuch as managerialsupervisionand andomission withunionism, thequalityoflaborrelationsmaybe correlated That being said, neither of thesefactorsmay bias the union coefficient. Brown and Medoffnor Clark findtheirestimatesto be sensitiveto the exclusionof laborqualitycontrols. functionalform One responseto the broaderproblemof a restrictive has been to assume a translogratherthan a Cobb-Douglas technology Union Effects 77 (Boal 1985; Bemmels 1987). The translogformallows one to test for restrictions on technologymade by Cobb-Douglas-for example,unitary elasticity ofsubstitution betweeninputsand homogeneity. Translogstudies havedecisively rejectedtheCobb-Douglasspecification. Yet as Allen(1987) pointsout,estimation ofanyproductionfunction byordinaryleastsquares (OLS) is strictlyappropriateonly when inputquantitiesare exogenous (see Nerlove[1965], pp. 29-34, fora moregeneralanalysisof thispoint). This is clearlynot the case in the productionfunctiontest,posing a simultaneity problemforall suchstudies.One responseto theproblemhas been to measurethe relativeefficiency of union and nonunionestablishmentsusing (translog) cost and profitfunctions(e.g., Allen 1987), in whichtheunioneffectis capturedvia interceptand slope parameters that varyby union status.Both functionshave the advantageof permitting a directestimateof the net effectof unionson profitsor costs,in contrast to the alternative practiceof comparingunion coefficients fromseparate productionand wage equations.2 Evidenceand Interpretation In lightof theconcernsregardingtheproductionfunctiontest,critical evaluationof the empiricalevidenceis required.We make no attemptto providea completereviewof what is now a largeliterature (for surveys, see Freemanand Medoff[1984];Hirschand Addison [1986]); rather,we examinecloselywhatwe believearethemostimportant studiesandpatterns evidentin this literature. The originalBrown and Medoff(1978) paper will be our benchmark. Usingaggregatetwo-digitmanufacturing industry data cross-classified by stategroupsfor 1972,Brown and Medoffobtain coefficients on uniondensityof from.22 to .24, implyingvaluesof c - 1 (obtainedby dividingtheunion coefficient by 1 - a) of from.30 to .31. In a separateanalysisusingthe 1973-75CurrentPopulationSurvey(CPS) files,theyestimatea logarithmic union-nonunion wage differential of .23 (averagedovermalesand females). Most ofthepotentialmeasurement problemspreviouslydiscussedapply with some forceto the Brown-Medoff study.While theseproblemsare largelyunavoidableand recognizedby the authors,any generalization of theirresultsmust meet the dual criteriaof plausibilityand consistency 2Analternative approach tomeasuring productivity differences istheestimation ofnonstochastic, nonparametric frontier production functions (Forsund, Lovell, andSchmidt 1980).Theseestimation procedures allowproduction efficiency to be decomposed intoallocative(price)and technical efficiency, thelatterbeing further decomposed intoa Farrellmeasure ofefficiency (a firmis technically inefficient ifit operateson theinterior of itsproduction set),a measure of input "congestion," anda measure ofscaleefficiency. In principle, suchestimation results wouldfacilitate inferences as tohowunionsaffect productivity. Thisapproach may provepromising forindustry-specific unionproductivity studies. 78 Addison/Hirsch withsubsequentfindings.By eitherstandard,theirestimateof the union is too high.Labor's sharein value added is .53 (Brown productivity effect and Medoff1978,p. 367), implyingan increasein unitcost of 12% (.23 times.53) stemmingfromtheunionwage premium.A .22 to .24 increase in totalfactorproductivity, however,in turnwould decreaseunitcostsby over 20%. Hence, the net effectof union wage and productivity effects would be to decreaseunitcosts substantially. Althoughunion effectson the profitratecannotbe ascertainedwith precisionfromthe change in unitcosts(Clark 1984), theseparameterestimateswould almostcertainly implyan increasein profitability resultingfromunionism.But theprofits literature providesunambiguousevidenceoflowerprofitability in unionized industriesand firms. Wessels (1985) casts furtherdoubt on the plausibilityof large union estimatesbecause of inconsistencies betweenthisresultand productivity employmenteffects.Specifically,he arguesthat if wage settingis constrainedby thedemandfunctionand laboris measuredin efficiency units in the productionfunction,it is impossibleto reconcileequal wage and increaseswith conventional(below unity)estimatesof the productivity elasticityof labordemand.The possibleexceptionis whereunionsexclubut even here it is shown that the sivelyenhancecapital productivity, betweencapitaland laborwould haveto fallconof substitution elasticity siderablybelow unityto producetheresultthatunionsraiseproductivity substantially. Again,conventionalestimatesof the substitution elasticity are too highto reconcileapparentlysmallunionemployment effects with the measuredimpactof unions on productivity. Wessels concludesthat mustbe wrong:eitherunionsdo notsubstantially one oftheeffects increase reduceemployment.3 or theysubstantially productivity Thereare surprisingly fewmanufacturingand economy-wideproductivitystudiesand,exceptforBrownand Medoff,nonereportsevidenceof a positiveoverallunion productivity effect.In perhapsthe best studyto date,Clark (1984) uses theProfitImpactof MarketStrategy (PIMS) data for902 manufacturing businessesfrom1970-80(over 4,600 usable observations)to estimatevalue-added(and scales) equationssimilarto (2). He obtainsmarginally coefficients on theunionvariablefrom-.02 significant to.-.03, in sharpcontrastto theresultsin Brownand Medoff.The Clark studyhas theadvantageofa largesamplesize overmultipleyears,businesson unioncoverage,and a detailedsetof controlvarispecificinformation ables (althoughthe union coefficient is littleaffectedby the inclusionof hisbasicpointis sound,limitations attachtoWessels'sanalysis. He 3Although ofefficient doesnotaddressthepossibility bargaining outcomes offthedemand curve,he appearsto say(Wessels1985,p. 103) thatunitcostsdo notchangeif andwagesincrease productivity byequalpercentages (thisignoresthefactthat ofresearch labor'sshareis lessthanone),andherather glossesoverthediversity findings. Union Effects 79 the latter).The studycan otherwisebe subjectedto many of the same criticismsthatapply to the Brown-Medoff analysis.In Clark's separate two-digit industry regressions, positiveunionproductivity effects arefound and petroleum(estimatesrange from 6% only for textiles,furniture, to 17%). StudiesbyBemmels(1987), who estimates a translogproductionfunction usinga limitedsampleof46 surveyed manufacturing plantsin 1982,Hirsch (in press),who estimatesa variantof equation(2) usinga sampleof 315 Fortune1,000 companies,and Lovell, Sickles,and Warren(1988), who estimatean economy-wideannual time-series model of equation(2), all concludethatunionsdecreaseproductivity (the estimateof c in thelatter studyis implausiblylow). Based on theextantevidence,we concludethat theaverageunionproductivity effectis probablyquite smalland, indeed, is just as likelyto be negativeas positive. As expected,resultsfromindustryand firm-specific productivity studies producea variedpicture.The primaryadvantageof thesestudiesis that manyof the econometricproblemsinherentin the aggregatestudiesare avoided. For example,outputcan be measuredin physicalunitsrather thanvalue added, information on firm-level union statusis morereadily can be allowed to differ betweentheunion and available,and coefficients nonunionsectors.Moreover,recentstudieshave moved away fromthe or have attemptedto avoid overlyrestrictive Cobb-Douglas specification inputendogeneityproblemsby estimationof cost ratherthanproduction functions.But theseadvantagesare achievedat thepriceof a loss in genof erality.Taken as a group,however,we believethatwithinthediversity theseresultsare to be foundsystematic patternsthatincreaseour understandingof how unionsaffecttheworkplace. Froma methodologicalperspective, two ofthebestanalysesareClark's studiesof the cementindustry(Clark 1980a, 1980b) and Allen's most recentanalysisof the construction industry(Allen 1987). Clark's studies arenotablefortheuse ofphysicaloutputmeasures,forallowingproduction functionparametersto varybetweenunion and nonunionplants,in controlling forfirmeffects throughthestudyofplantschangingfromnonunion to unionstatus,and in introducing a supervisory labor inputmeasure.In hiswiderstudy,Clark(1980b)investigates between productivity differences ninenonunion(29 observations)and 119union(436 observations)cement plantsovertheperiod1973-76.He findsmarginally significant (usingonein the range.07-.10. An interesting tailedtests)union coefficients result is thatunionproproductivity effects aremostpronouncedin theSouthwest regionof his sample,wherenonunionfirmsare mostprevalent,although, as before,theunioncoefficients are estimatedwithconsiderableimprecision. In a novel studyof six cementplantsthatchangedfromnonunion to union statusbetween1953 and 1976,Clark (1980a) reportsa positive differential of from6% to 8%. Althoughsignificance union productivity 80 Addison/Hirsch levelsareagainweak,evidencefromhis fixedeffects modelindicates a effect smallpositive productivity thatis apparently sustained through time. In perhapsthemostambitious studyto date,Allen(1987)attempts to therelative measure efficiency ofunionandnonunion establishments using functions. areestimated costandprofit Translogcostfunction forthree office separatesamplesof buildingconstruction projects(commercial buildings, schools,andhospitals).As notedearlier, thisapproachallows and also sidesteps fortheendogeneity of inputquantities atproblems betweenunionproductivity and wageeffect tachingto thecomparison difestimates fromseparate andearnings functions production containing levelsofaggregation. ferent control variables orestimated atdifferent Allen finds inschoolandhospital higher costsforunioncontractors construction, butlowercostsin commercial office buildings, ceterisparibus.The hyis soundlyrejectedacrossall pothesisof equal costfunction parameters betweencoefin theschoolssample;however, differences specifications arelessevident in thecommercial office ficients buildings sample(while thenumber ofnonunion is toolimited to allow-suchtestsinthe hospitals hospitalsample). A striking result thisstudyisthefinding from ofgreater scaleeconomies in theunionsector;diseconomies appearin thenonunion sectoratlower morerapidly withoutput. Unionoffice outputlevelsandincrease building exceeda threshold construction costslessoncebuildings sizeand,thereafter, becomessteadilylessexpensive withoutput.For schools,on theother costsfallwithoutputin theunionsample hand,eventhoughmarginal aremorecost contractors (and risein thenonunion sample),nonunion efficient at all outputlevels.Takeninconjunction withhisprofits results, a competitive thesefindings unionexplanation support foroffice buildings anda monopoly unionexplanation forschoolsandhospitals (see,relatedly, Allen1986a).Office sector whileschools arebuiltfortheprivate buildings andsomehospitals Allenarguesthatmarket arebuiltforthepublicsector. characterizes segmentation publicsectorcontracts, allowingunionconIn commercial struction to havehighercostswithout in profits. sacrifice office theabsence andgreater ofmarket buildings, bycontrast, segmentation cost consciousness requirecompetitive unionism.Scale economiesin areattributed unionized to theeffectiveness ofunionhiring construction hallsinguaranteeing of(alreadyscreened) skilledlaborand, largesupplies in part,to theirrelevance of certainrestrictive practices (e.g.,minimum crewsizes)onlargeprojects. He isunabletoquantify theseeffects, although itdoesappearthathisresults reflect morethanjustcompositional effects (see Allen[1986b]forfurther discussion ofscaleeconomies). We havedwelledat somelengthon theAllenstudybecausenotonly doesitprovide a glimpse insidetheunionproductivity blackbox,butalso demonstrates palpablythattheunionimpactis nota datum,hintsat the andaddresses a number roleofmarket of potentially important structure, Union Effects 81 in theliterature. We notethattherationaleforpositiveunion deficiencies because productivity effects is notrootedin collectivevoiceconsiderations relationthatobtainsin construction. of theshort-term employment studies,severalsysDespitesubstantial diversity in theindustry-specific tematicpatternsare revealed.As previouslynotedin Hirschand Addison effects tendto be largestin those (1986, chap. 7), estimatedproductivity whereunion-nonunion aremostpronounced. industries wage differentials Of course,such a patternis exactlywhatwould be predictedby criticsof theproductionfunctiontest.We contendthattheseresultsalso supporta of unionization.In industriesor traditional"shock effect"interpretation firmswhereunions obtain largewage premiums,managementmustrereducing spondto theincreasein laborcostsbyorganizingmoreefficiently, slack,and increasingmeasuredproductivity.4 effects are largelyrestricted to the Second,positiveunion productivity wherecompetitive pressures privatesectorand appearto be mostsignificant are intense.This latterpointwas takenup by Clark (1980b), who found effectin the regionwherenonunioncomthe largestunion productivity petitionwas most pronounced.Similarly,in an earlyand widely cited in two cities,Mandelstamm(1965) idenstudyof residentialconstruction in a nearbymetropolitan tifiedcompetitionfromoutsidecontractors area observedin his more highly as the chiefsourceof the greaterefficiency unionizedcity.And in Clark's (1984) analysisof lines of business,the differentials were foundin largestpositiveunion-nonunionproductivity and industries havingrelatively largenonunionsectors(textiles,furniture, in public effect petroleum).The apparentabsenceofa sizableproductivity bureaus libraries(Ehrenberg,Sherman,and Schwarz 1983), government (Noam 1983), schools(Ebertsand Stone 1987), and hospitals(Sloan and Adamache1984), despitesignificant unionwage premiumsin all but the librarysample,supportsthe thesisthatproductmarketcompetitionis a in unionizedmarkets(this themeis examined spur to greaterefficiency directlyby Allen [1987,1986a]). Perhapsthemostdirectevidenceof a shockeffectis reportedby Clark tounionismexhibitfairly (1980a), who findsthatmanagement adjustments consistentpatternsin the wake of unionization.In all cases new plant managerswerehired,and in mostcases therewas increasedemphasison cuttingcosts,establishingproductiontargetsand goals, and improving remains. and communications. Yet a problemofinterpretation monitoring 4Causation could be arguedto work in the opposite direction,with unionThis appears inducedproductivity increasesleadingto largeunionwage premiums. unlikely.If unionismraisedproductivity directly,therewould be mutualgains fromunionization,with labor and shareholderssharingin the gains. Thus we in nonunionfirmsencouragingunionorganizingand would observemanagement in unionfirms. higherprofits Neitheroutcomeis observed.Moreover,firm-specific market-clearing wages. productivity changesshouldnot affectcompetitive, 82 Addison/Hirsch cost-consciousecoThe evidenceindicatesthata relativelycompetitive, nomicenvironment is a necessaryconditionfora managerialresponseto gain. Such a response unions thatwill produce a positiveproductivity shouldalso be larger,ceterisparibus,the largertheunion wage gain (or, the greaterthe pressureon profits).It is preciselyin such alternatively, however,thatthereshould be relativelylittle competitiveenvironments, managerialslack and theleastscope forunionorganizingand wage gains. This reinforces our earlierconclusionthatthepossibilityforsizableunion effects is limited.Clearly,anyjudgmenttakenon thepotential productivity enhancement hingescruciallyon one's priors scope forunionproductivity and slack in theeconomy.5 regardingthedegreeof competitiveness and perhapsmore appealingexplaFor thisreason,a complementary nation of the empiricalregularitiesin the literaturewould be that the studiessuffer froma selectivity or survivalbias. As discussed productivity in in the previoussection,union firmsunable to increaseproductivity responseto unionwage increasesare less likelyto surviveand be included datasamples.Thus,estimates in researchers' ofunioneffects on productivity (or profitsand costs) are biased estimatesof the union effecton a representativesampleof nonunionfirms.Not all firmsare "shocked" or able unioncostincreases.In thelongrunthese to offset to respondsufficiently firmswill not survive. theworkplace Directevidenceon theroutesthroughwhichunionsaffect remainsmeager.As Brownand Medoff(1978,p. 374) state:"The idea that unionsmake firms. . . moreproductivewould be morepersuasiveif the is improvedcould be isolated."A cenmechanismsbywhichproductivity traltenetof the collective-voiceframework motivatingtheseanalysesis ofvoiceforexitwill reducequitsand improvemorale thatthesubstitution and cooperationamongworkers.Relatedarguments suggestthatimproved structures can lead to unionproductivity gains.Yet theevidence governance evidencerevealsthatquits and time-series is opaque. While cross-section are significantly lower among union workers,ceterisparibus(Freeman 1980;Blau and Kahn 1983;and Mincer1983), thereis littleto suggestthat thisadvantagesignificantly Clark(1980a) recontributes to productivity.6 portseitherno changeor evenhigherquitsfollowingunionizationin three of thesix plantshe followedovertime.One routethroughwhichunion is via the establishment of procedures voice mightimproveproductivity powerduringa periodwhere S Unionsinitially mayorganizeand gainbargaining is marketpower.Union impacton profitability a firmor industryhas significant increase likelyto intensify overtimeas foreignand domesticnonunioncompetition and unionwage increasescannotbe passed throughto consumers. 6 Brown and Medoffintroducea quits variableinto theirproductionfunction of lowerquitson to theeffects and attribute thereductionin theunioncoefficient theresidual byone-fifth; productivity. Thisprocedurereducestheunioncoefficient comto "bettermanagement, morale,motivation, four-fifths arelooselyattributed munication, etc." (Brown and Medoff1978,p. 74). Union Effects 83 but thereis no directevidenceto supportthisview. to handlegrievances, Ichniowski(1986), using data from10 unionizedpaper mills,findsthe numberof grievancesfiledto be inversely relatedto productivity (see also Katz,Kochan,and Gobeille 1983); leftunansweredin thistreatment, howof union voice in reducingand/or arbitrating ever,is the effectiveness grievancesrelativeto implicitgrievanceproceduresoccurringin similar nonunionplants. unobserved In sum,we should expectto findrathermorepositiveand directindicationsoftheoperationofcollectivevoice.Furtherambiguity is occasioned by Allen's (1984a) findingthatabsenteeismis at least30% higheramong union workers(even thoughhe reportsthatthe decline in productivity fromthissourceis onlya fraction of 1 percent).The greaterdissatisfaction apparentlyexpressedby union workersneed not be inconsistentwith union-inducedimprovements in efficiency via collectivevoice (Freeman and Medoff1984,chap. 9; Leigh 1986). But neitheris it inconsistent with a shockeffect explanationwherebytheworkpace is increasedin unionized settings, leadingto greaterworkerdissatisfaction. Finally,thereremainsthe unresolvedproblemof union endogeneity. We knowthatunionworkplacesdiffer fromnonunionworksubstantially places(Duncan and Stafford 1980;Freemanand Medoff1984). Can unions moresuccessfully organizewherethereexistspecial cost advantages?Or, as suggestedbyBrownand Medoff(1978,p. 368), areunionsmoreheavily Do U.S. companies' organizedin less productive(two-digit)industries? newerand largelynonunionplantshave higherproductivity than their older and morehighlyorganizedplants?We know of no studythathas in estimating satisfactorily addressedtheissueofunionendogeneity unionnonunionproductivity differentials. We concludethatthereis no compellingevidencethat,in general,the net effectof unions on productivity is positiveor negative.Ratherby default,theexplanationforpositiveunionproductivity wherethey effects, are observed,is best explainedby eithershock effectargumentsor by in theproductionfunction deficiencies test.Actualunionproductivity gains appearto be generated bymanagement responsesto sizablewagepremiums, significant nonunioncompetition,and deteriorating profitexpectations. Estimatedunion-nonunionproductivity differentials may resultfroman entanglingof union productivity, Or we may be price,and wage effects. observingtheoutcomeof a competitiveprocessin whichless productive unionizedenterprises have been selectedout of the system.Accordingly, our analysisof union effects mustexaminedynamicaspectsof economic performance. III. Unionsand Profitability of theproductivity evidenceis the Closelyrelatedto theinterpretation issueof how labor unionsaffectprofitability. One of the moretroubling Addison/Hirsch 84 betweenthe puzzles in theliterature has been theseeminginconsistency unionproductivity ofa substantial effect and mounting empirical suggestion reducesprofitability. Information on evidencethatunionismsignificantly unionwage and productivity effects, coupled withknowledgeof labor's on unitcosts.For exshare,makespossiblea calculationof union effects effect ample,a productivity of9% wouldleavea firm'sunitcostsunchanged iflabor'ssharewere .60 and theunionwage premium15% (it is assumed thatthefirmis fullyunionizedor,alternatively, thatnonunionemployees also receivea 15% premium).The linkbetweenunitcostsand profitrates, In general,it dependson the natureof the however,is not transparent. the bargainingsettlement (e.g., on thedemandcurveor strongefficiency), productdemandelasticity, marketstructure, and the elasticityof substitutionbetweencapitaland labor (Clark 1984). Perhapsthe simplestcase is thatof sequentialwage and employment and productivity determination on thelabordemandcurve,withoffsetting wage effectsthatleave unitcosts unchanged.For a productmarketmonopolist,Clark (1984,pp. 896-97) showsthattherateof returnon capital willdecrease(increase)iftheelasticity ofsubstitution is greater(less) than one, whereasthe returnon sales will remainunchanged(because Q and P do not change). is thestrongefficiency case. For purposesof comparMore interesting ison, examine,initially,the case of inefficient sequentialwage and emon the demandcurve,in which(subjectto conploymentdetermination straints)theunionmaximizes"rents,"R, and thefirmmaximizesprofits, 11,givenwu. That is, max R = (wu - wo)L (union maximand), (5) and max 11 = PQ - rK - wuL (firmmaximand), (6) whereQ is output,P productprice,K capital,r thepriceof capital,wu is the realizedunion wage,wo is the wage in the absenceof unions,and L is employment. A measureof the excessof the union wage bill over the competitive wage bill,R, has been a commonmaximandassumedin the literature (e.g., Rosen 1969). Such an outcome is inefficient: settlements by both parties preferred existoffthe demand curve,at a lower wage, and a higheremployment level.An efficient bargainingsituationon a verticalcontractcurveimplies thatthetwo partieswill maximize(borrowingterminology fromAbowd [1987]) the totalvalue of the enterpriseV, beingthe sum of firmprofits (11) and union rents(R), and thenbargainover divisionof the surplus. MaximizingV resultsin thesameoutput,price,and inputusageas obtains 85 UnionEffects in thecase wherethe firmmaximizes11 subjectto the competitivewage cost wage,wo; thatis, or opportunity max V = 11 + R = PQ - rK - waL + (we - wo)L = PQ - rK - wOL. (7) costwage accordingto theopportunity Thus,thefirmadjustsemployment and not its "own" wage. Here, the union has no short-runreal effects to whichwe turnsubsequently).Since (unionswill have long-runeffects in thiscase, Q, P, K, and L are not affectedby the union,we can state unambiguously thata unionwage increase(wa > wo), withno offsetting increase,will decreasethe profitrate,whethermeasuredby productivity ratesof returnon sales or capital,the price-costmargin,or market-value measures. A positiveunionproductivity effect, takenin conjunctionwitha union wage increasethatleavesunitcostsunchanged,will also resultin a lower profitrate(Clark 1984). Continuingto assumethatthe firmacts as if it effect union productivity facescompetitivefactorprices,a factor-neutral would have the same effectas a decreasein marginalcosts, increasing optimaloutputand loweringprice.Input usage will increaseor decrease (K/L remainsconstant)dependingon whethertheproductdemandelasticityrj is greateror less than unity(Clark's monopolymodel implies 1 > 1). The profitratewilldecreasesinceP falls,unitcostsremainconstant, withoutput. and theuse of K variesproportionately The pointof the above discussionis thata comparisonof union wage and productivity effects estimateoftheunion providesonlyan approximate effecton profitrates.By the same token,evidenceon union wage and profiteffects does not allow a preciseestimateof the union productivity effect.Empiricalevidence on union-nonunionprofitrate differentials, estimates. ofproductivity however,does permitus to gaugetheplausibility is importantin itsown rightsinceit is More fundamentally, profitability thatshouldmostaffectfirmsurvival,managementbehavior, profitability and long-runresourceallocation. Beforeturningto the empiricalevidenceon union profiteffects, some commentsarein order.The empiricalstudiesare surprisingly preliminary thelong-standing attention givenunionwage recent,especiallyconsidering studiesfrom effects by laboreconomistsand the plethoraof profitability theindustrialorganizationliterature. Studieshave employedas theirunit of observationeitheraggregateindustry,firm,or line-of-business (LB) measureshave been examined.The industry data. Severalprofitability use theprice-costmargin(PCM), definedas (total studiesmostfrequently revenue- variablecosts)/totalrevenue,typicallymeasuredby PCM = (value added - payroll - advertising)/shipments. (8) 86 Addison/Hirsch Firm-levelanalyses,by contrast,are likelyto use accountingmeasuresof the rateof returnon sales (r, = earnings/sales)or the rateof returnon capital (rk = earnings/assets). Severalof thefirm-level analysesfocuson publiclytradedfirmsand use the most frequentbeing a stock marketvalue measureof profitability, Tobin's q, definedas q = marketvalue/replacement costsof assets. (9) Firm-levelstudiesalso have employed"events" analysesthat calculate changesin a firm'smarketvalueattributable to notfullyanticipatedevents involving unionization(e.g.,representation electionsor changesin contract provisions).A typicalmeasurehereis thatof cumulative abnormalreturns, CAR, definedas CAR = ract- rexp, (10) whereractis a firm'sactualrateof return(includingdividendsand capital gains) and rexp is the firm'spredictedrateof returnbased on a "market" equation(which regressesa firm'sr on a broad-basedmarketportfolio's r) estimatedover some period well beforeand/or afterthe event.CAR are summedover the period forwhich it is believedpublic information about, or anticipationof, the eventmightaffectthe stock price. CAR typicallyare averagedover a sampleof firmsin orderto draw inferences as to averageunioneffects.7 is entirely PriceNone ofthemeasuresusedin theliterature satisfactory. cost margins(PCMs) are readilymeasurablewithindustrydata and correspondmost closelyto the excess of price over variable(or marginal) cost,on whichso muchindustrial organizationtheorycenters.In practice, however,PCMs may not correspondcloselyto the profitmeasuresthey are intendedto represent(Liebowitz 1982). At thefirmlevel,accounting ratesof returnare readilyavailablefromfinancialreportsand measure actualor realized,as opposed to expected,earningsat particularpointsin time.Unlike accountingmeasures,stockmarketindicatorssuch as q are ratherthan historical,measureperformanceover time forward-looking ratherthanforsingleperiods,adjustforriskdifferences acrossfirms,and areless likelyto be influenced byendogenousaccountingprocedures.The eventstudiesalso use stockmarketmeasuresand havetheadded advantage of identifying theeffects of specificeventson marketvalue. Yet isolating the effectsof unanticipatedeventsis oftenelusive(Binder 1985), and it see BeckerandOlson (1987). 'For a detailedreviewofunioneventsstudies, ofstrikes onsecurity examining theeffect analyses events Here,wedo notconsider prices. Union Effects 87 (e.g., certifito generalizefrom"marginal"unioneffects maybe difficult cation electionsand concessionbargaining)to averageunion effectson profitability. is presented on profitability ofunioneffects ofU.S. estimates A summary in table 1. The moststrikingresultof thestudiesis thecommonthemeof among differences in unionregimes,despitesubstantial lowerprofitability analysesin methodology,data source,unit of observation,timeperiod, Moreover,themagnitudeof thereductionin and measureof profitability. profitsis large.Althoughobservedpercentagereductionsare not strictly Of the aggregatemanucomparable,thereare some strikingsimilarities. andAnnualSurvey studiesusingCensusofManufactures industry facturing data,Freeman(1983) findsthatmovingfrom0% to 100% ofManufactures union coveragelowersprice-costmarginsby 13%-19%. Corresponding estimatesby Voos and Mishel (1986a) and Domowitz, Hubbard, and Petersen(1986, 1987) point to reductionsin PCMs of 23% and 22% to 25%, respectively. analyses,Clark(1984) reportsthatunionbusinesses Amongthefirm-level 19% and have ratesof returnon capital and sales thatare, respectively, while Hirsch and 18% lower thanthoseof theirnonunioncounterparts, Connolly (1987) estimateunion effectson r, rangingfrom11% to 17% and on Tobin's q from13% to 20%. Hirsch (in press) reportssizable in rk and q betweencompanieswith low and high levels of differences collectivebargainingcoverage.Ruback and Zimmerman(1984) obtain butfindon averagethatunionwinsin representation highlyvariableresults, electionsreducemarketvalueby3.8%,whereasunionlosseslowermarket value by 1.3%. Abowd (1987) calculatesthe cost of union contractsfora sample of publiclytradedfirmsand findsthatunanticipatedchangesin roughlydollarfordollar,bychangesin shareholder unionwealthareoffset, wealth.An anomalyamongthestudiesis Allen's(1987) findingthatprofits projectsare at leastas highas thoseon nonunion on union construction projects,despitehigherunioncostsin two of his threesectors.8 Some perspectiveon themagnitudeof theseestimatesis in order.Typically,the reportedestimates(or partialderivatives)are evaluatedon the basisofa changefromzero to completeunioncoverage,whenin factmost industriesand largefirmshave partialcoverage.On the otherhand,the maybe biased upward(towardzero) in many negativeunioncoefficients bias, measureof thesestudiesforreasonshavingto do withsimultaneity to more are Unions bias. likely organizein menterror,and selectivity 8 Allenattributes pricesto higher to passthrough ofunionprojects theability unionandnonunion whereby segmentation market ofgeographical theexistence eachother. against directly compete rarely construction firms inschoolandhospital inthesesectors is possiblebecauseofthelackofcostpressure Suchsegmentation appliesherebutnotin hisprivate thattypically wagelegislation andprevailing sample. office building 0 C U CZ> CZC ~~~~~~~~~~1 CZ ~~~~~~~C) U U~~~~~~~~~~ o L) S g -~~~~~~~~~~~-o 4,0 (JS~~~~l 4- t ,UU 4- 0~~~~~~~~~~~~~~ CZC E C)CL o o 00o- - U -~~~~~~~~C 1C0 - I 0 CsCL0 88 C: C) U C -1Z -' C' C'S Ct 0 0 o uC~-~U C Q< Rt -. o5 > 4. 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'S x a .-C~~~~~~~~j C tC a x U ucs, c CIC- C~~ _ c U C I C-~ $ U 0 CIS~~~~~~~~ U O CI 4 (n~~~ > v 'Ct :$C'S > ~~~~ )0)~ -~~~~~~~ ~ ~ C'~~~~~,,U 0) ~ CIS U X CX.C C' U U ~ Ct C's > C~~~~~~~~~~~~~~~~' 91~~~~~~~~~~~~~~. - z -c ' 92 Addison/Hirsch industries and firmswherepotentialprofitsare high,biasingtowardzero in OLS profitequations.Voos and Mishel the(negative)unioncoefficient bias, obtainingestimatesof a 35% (1986a) findevidenceof simultaneity reductionin PCM whenunionismis endogenous,as comparedwith23% withOLS (Hirsch and Connolly [1987] providesimilarqualitativeevidence). Substantialmeasurementerrorin the union variablemay arise industry industry unionmeasuresto four-digit frommatchingthree-digit results or to individualfirms.Confidencein theunion-profits observations has been enhanced,however,by studiesmeasuringunion coverageat the line of businessor companylevel (Clark 1984; Abowd 1987; Hirsch,in the problem.The data reflect press).Finally,thereis a potentialselectivity thathavesurvivedunionization; performance onlyofthoseestablishments thus,union effectson survivingfirmsmay be a biased estimateof actual firmsand potentialeffects on currentnonunioneffects on nonsurviving union firms. Rubackand Zimmerman's(1984) eventsanalysis,and thecloselyrelated studybyBronarsand Deere (1987), provideperhapsthemostdirectmeaon suresof the expectedeffectof union organizingand representation marketvalues. Inferencesdrawn fromthese studiesmust be qualified, however.The unionelections(coveringat least750 workers)typicallydo notincludetheentirefirm,theprofiteffects fornew (marginal)unionized of union effectsin existingcompanies, firmsmay not be representative and resultsare highlyvariableacrossfirms(Ruback and Zimmermanfind thatequityvalues increasedin 35% of the firmswhereunions won representation). Althoughthe magnitudeof the profitreductiondue to unionization itdoes appearto be substantial. This in turn cannotbe identified precisely, issueofthemeansthroughwhichsuchsignificant profit raisesthedifficult those To addressthisissue,we mustfirstidentify reductionsare effected. mostaffected byunionsand,second,locatethesources firmsor industries ofunionrents.To theextentthatunionsreduceprofitsbelow competitive For thisreason, levels,thelong-runsurvivalof unionfirmsis threatened. of are economic profits derivingfrom rents themostlikelysources union marketpower and quasi rentsassociatedwithspecial firmadvantagesor Note thatmonopoly capitalinvestments. long-livedphysicaland intangible at low profitsneed not be fullyappropriablewhere firmscan transfer, On theotherhand,approcost,productionto a nonunionenvironment. priablequasi rentsneed notbe associatedwithmonopolypoweror suprareturns;rather,theymaysimplyrepresentnormalreturnsto competitive (Klein, Crawford,and Alchian 1978). long-livedinvestments Much attention has focusedon therelationship betweenunions,profits, and marketstructure.Clark (1984) findsforthe PIMS sample thatthe associatedwithunionizationis entirelyrelargereductionin profitability strictedto businesseswithlow marketsharesdespitemuchhigherprofit ratesin firmswithhighmarketshares.Clark rationalizesthissurprising UnionEffects 93 mechanismby whichroughlyequal resultby postulatinga transmission union wage increasesare generatedthroughoutan industry,with large on low marketshare,low-marginfirmsand negpercentageprofiteffects firms.This resultis not ligibleeffects on highmarketshare,high-margin elsewhere(e.g., Hirschand Connolly1987) and would seem corroborated to be specificto thePIMS sampleof businesses. Freeman(1983), In whatappearsto be the leitmotivof thisliterature, Karier(1985), and Salinger(1984) conclude that negativeunion profit arerestricted to highlyconcentrated industries (but see Domowitz, effects Hubbard,and Petersen1986;Voos and Mishel1986b).Freemanand Karier base theirconclusionson industryPCM equationsin which an industry withconcentration (or concenunionizationvariableinteractsnegatively profitreductrationdummies).Both authorsreportlargeand significant industriesand an absenceof profitreduction tionsin highlyconcentrated in lowlyconcentrated industries. Salinger'sevidenceis lessstraightforward. He estimatesa nonlinearleastsquaresprofitequation(withq as theprofits measure)in which industryunionismentersin a three-wayinteraction His union coefwithconcentration and a vectorof profitdeterminants. ficientcan be treatedas the"tax rate"on thereturnsproducedjointlyby and theprofitdeterminants. He, too,concludesthatunions concentration capturemostof themonopolyprofitsassociatedwithconcentration. The abovestudiesappearto showthatunionlaborcapturesa significant whilehavinglittleeffectin relatively shareofpotentialmonopolyprofits, industries. Theyalso establishthattheomissionofunion morecompetitive variablesin traditionalprofitmodelsis a seriousflaw.Despite the appeal of thesefindings, theconclusionthatindustryconcentration providesthe majorsourceforunionrentswould appearto be incorrect(fora detailed critique,see Hirsch and Connolly [1987]). For example,it is far from does in factproduceanyexcessprofitsfrom settledwhetherconcentration whichunionscan extractrents.Few firm-level analysesfindconcentration and manyfinda negativerelation determinant ofprofits, to be a significant betweenthe variables(Bothwell,Cooley, and Hall 1984).9 Indeed, Raon venscraft (1983) and othershave shown thatthe positivecoefficient in industry-level concentration profitstudiesmayinsteadcapturetheeffect offirm-level marketshare.Usingfirmor line-of-business-level data,market ofprofits, whereasconcentration shareis an important positivedeterminant is, ifanything, negativelyrelatedto profits. is the major source forunion gains,there Moreover,if concentration evidencefromthe labor marketindicatinga should existcorroborative forunionsto findslittleevidence generates profits thatconcentration 9Salinger toFreeman (1983)andKarier ina manner similar hisresults capture yetinterprets leastsquares Salinger's nonlinear (1985).HirschandConnolly(1987)reexamine formis functional results usinga similardatabase.TheyshowthatSalinger's thatconcenforthecontention andthatthereis littlesupport undulyrestrictive a sourceforunionrents. profits provide tration-related 94 Addison/Hirsch differential in moreconcentrated compensation largerunion-nonunion studies genfunction industries (HirschandConnolly1987).Yetearnings increases either unionornonthatconcentration erallyfindlittleevidence oflarger microlevel evidence unionwages,andthereexistsno significant in moreconcentrated industries (Lewis 1986,pp. 154unionpremiums smaller inmoreconunionpremiums appearsomewhat 55). Ifanything, on Toevidence industries (e.g.,Mellow1983).Andfirm-level centrated obtained thattheresults bin'sq andr,(HirschandConnolly1987)suggests and omitted to specification in earlierstudiesmayhavebeensensitive 10 variables. structure hasshifted awayfroma focuson market Recently, attention In as a sourceof uniongainstowardquasi rentson firminvestments. model,itisarguedthatwhenthecapitalcycle Baldwin's(1983)theoretical the thesurplusthatprovides is longrelative to theunion'stimehorizon, to capturebyorcapitalis vulnerable return on durableand specialized willsharequasirents ganizedlabor.Oncesuchcapitalis inplace,thefirm to shutthefirm down.Baldwin thanallowa strike withtheunionrather islikelytokeepinplaceinefficient contends a unionfirm that,inresponse, unionwagedemands. Subsequent papers capitalas a meansofmoderating with to be compatible thatunionbehavioris unlikely haveemphasized thatis,thejointwealthofshareholders andpotential pluscurrent efficiency; as longasunionmembership willnotbemaximized future unionmembers is nontransferable. Hirsch,andHirschey (1986)extendBaldwin'srent-seeking Connolly, unionsas a taxon the capital,treating modelto thecase of intangible research and development fromnontransferable (R&D) capital. returns arkfoundto add lessto withthatmodel,R&D investments Consistent industries inhighly thanto thevalue unionized valueoffirms themarket Lawrence and Lawrence in industries. unionized of firms lowly (1985) in a declining withhighfixed industry developa modelin whichfirms unionbargaining power. capitalwillfaceincreased costsfromlong-lived in the be enhanced is union that powermay Theirargument bargaining the in a decline decrease demand. Such run a decline may secular short by in of substitution the due to a decrease of labor demand elasticity elasticity to substitute fromtheinability capitalfor lumpylabor-saving stemming toexplain tothesteelindustry unionlabor.Themodelisappliedspecifically steeloutput unionwagepremium accompanied falling whyan increased '? Hirschand Connolly(1987) concludethatreturnsto marketshare,R&D, and limitedforeigncompetitionmay be more likelysourcesof union rentsthan is TheirmarketshareresultsconflictwithClark's (1984) rathercounconcentration. Note thata likelysourceforuniongainsarerentsmadepossible findings. terintuitive suchas postal protectionand regulation;forexample,in industries bygovernment airlinesand trucking. deliveryand, priorto deregulation, UnionEffects 95 duringthe seventies,followedby rapidemploymentdeclinesduringthe Linnemanand Wachter[1986]). eighties(see, relatedly, modelsis thattheuniontax on A predictionof theunionrent-seeking investment behaviorand,subsequently, that a firm'squasi rentswill affect We returnto thesethemesin the firm'slong-runeconomicperformance. or value nextsection.But notethatevidencesupportingstrongefficiency givenlevelsof quasi rents(Abowd 1987), does not imply maximization, if union bargainingpower affectsfirminlong-runallocativeefficiency vestmentbehavior. to effecta comparisonof illuminating Finally,it would be particularly virtually survivalratesbetweenunionand nonunionfirms.Unfortunately, is availableto us in thisarea.An exceptionis the limited no information analysisby Kaufmanand Kaufman(1987) of the automotiveengineand concludingthatfirmsorganizedby theUnitedAuto bodypartsindustry, morelikelyto havefailedthannonunion Workers(UAW) aresignificantly and non-UAWunion firms.This findingis consistentwithestimatesdefirmsof a largeUAW compensation rivedfromtheirsampleof surviving premiumrelativeto non-UAWand nonunionfirms. (but notproductivity) to lowerprofitability under The above evidencepointsunambiguously unionism.Despite a varietyof statisticalproblemsthattendto bias estimatedprofiteffectstowardzero, unions' trueimpactis likelyto reside profits withintherangeofestimatespresentedin table1. The productivity puzzle statedat the outsetof this section-that evidenceof largeunion effectsis incompatiblewith evidenceof large profitreducproductivity tions-may be more apparentthan real. Our readingof the evidenceis seem likelyto resultfroma combination thatreductionsin profitability of union wage increasesand rathersmall (and possiblynegative)union effectson productivity. (Note again the variabilityin each effectacross firms, industries, and time.)Althoughit is notin doubtthatunionsreduce over long periods of time,competitivepressuresin labor, profitability limittheprofitspreadbetween product,and capitalmarketsmustultimately union and nonunionfirmsor lead to reductionsin the size of the union sector.The steepdeclinein privatesectorunionismmayhave resultedin ofU.S. companies no smallpartfromtherelatively poorprofitperformance in ecoduringthe 1970s.The magnitudeof union-nonuniondifferences nomicperformance duringthe 1980sawaitsdetailedempiricalscrutiny. IV. Unions, Investment Behavior, and Productivity Growth on-the-demand-curve modeltreatsa unionwage increase The traditional as an exogenousincreasein the priceof labor and a relativedecreasein the price of capital. Profit-maximizing firmsrespondby freelyvarying theirinputmix,increasingthe relativeuse of capital and higher-quality labor.Investment activitymayincreaseor decrease,dependingon therelof scale and substitution theunionrentativestrength effects. By contrast, 96 Addison/Hirsch seekingmodel views union wage increasesas an outcome made possible by a tax on thefirm'sreturnsor quasi rentsaccruingfrommarketpower A firmfacinga powerfulunion is less likely and long-livedinvestments. to putin place newlong-livedcapital(evenofa labor-saving type),because a unionwitha crediblestrikethreatcan appropriatea shareof thenormal In the faceof effective returnsfromthatinvestment. rentseeking,firms in tangibleand intangiblecapital whose returnsare reduceinvestments mostvulnerableto unioncapture." Empiricalevidencewithdirectbearingon the union rent-seeking hypothesisremainsmeager.Baldwin (1983) contendsthat her theoretical well to the steelindustry(see, also, Lawrence model applies particularly and Lawrence1985). Connolly,Hirsch,and Hirschey(1986) hypothesize thatfirmsin highlyunionizedindustrieswill investless in R&D because such investments add less to the marketvalue of union than nonunion firms.Based on evidencefroma 1976 sample of 367 Fortune500 firms, havesignificantly lower theyfindthatfirmsin highlyunionizedindustries R&D intensity(R&D investment divided by sales). Union and unionprofitability interaction variablesenternegativelyin theirR&D intensity bothdirectly equation,suggestingthatunionsdecreaseR&D investment and also througha redirection of earningsaway fromvulnerableR&D. Two recentstudiesalso conclude thatinnovativeactivityis less pronouncedin unionizedfirms.Acs and Audretsch(1987) use 1982 manudataand findsignificantly fewerlarge-and small-firm innovations facturing in highlyunionizedindustries.12Hirsch and Link (1987) providesimilar evidencefroma surveyof 315 small-and medium-sizedNew York state businessesin 1985.Theirorderedprobitmodels,in which manufacturing Likert-scaleresponsesto surveyquestionson the importanceof product " In additionto thepapersby Baldwin(1983), Lawrenceand Lawrence(1985), and Connolly,Hirsch,and Hirschey(1986), see Grout (1984) and Tauman and Weiss (1987). Using a Nash bargainingmodel,Grout shows thatfirmsfacinga union will have lower levelsof investment when contractsare nonbindingthan when theyare binding.Tauman and Weiss develop a duopoly model in which eitherthe union or nonunionfirmmay choose the mostproductivetechnology, dependingon thesetof assumptionschosen.In thecase wheretheunionchooses a wage afterfirmsselecttheirtechnologies, theunionfirmis unlikelyto adopt the mostproductive technology. Note thatevenifcooperative(i.e.,jointlymaximizing) will be below the competitivelevel if the union's settlements obtain,investment timehorizonis shorterthantheexpectedlifeof capital.For a fullerdiscussion,see Hirsch(in press). 12 The numberof innovations are calculatedseparatelyforlargeand smallfirms withinindustries. The data wereprovidedby the Small BusinessAdministration, whichdefinesan innovationas "a processthatbeginswithan invention, proceeds withthedevelopment oftheinvention, and resultsin introduction ofa newproduct, processor serviceto themarketplace"(Acs and Audretsch1987,p. 110,n. 1). Union Effects 97 innovation(relativeto theircompetitors)are thedependentvariables,inis significantly dicatethatinnovativeactivity lessimportant forunionthan fornonunionbusinesses. Recentwork by Bronarsand Deere (1986) and Hirsch (in press) offer more comprehensiveanalysesof union effectson firminvestmentand financialbehavior.Bronarsand Deere developa dynamicmodelin which joint wealthmaximizationby shareholdersand currentunion members and all current does notmaximizerentsaccruingto shareholders and future unionmembers.Because currentunion memberscannotbe compensated by futureunion members(e.g., throughthe purchaseof union memberhave an incentiveto shiftpositivecash ship), boththeyand shareholders flowscloserto thepresentand defernegativecash flowsfurther intothe future.Hence, Bronarsand Deere predictthatunionizedfirmswill have lower tangibleand intangiblecapital investments, offera higherpayout and relymoreheavilyon debt financing.Empirical rateto shareholders, resultsfroman unbalancedpanelof756 publiclytradedfirmson theCompustattapesbetween1972 and 1976,matchedto industry union coverage data,providesupportforthesehypotheses."3 Otherthingsequal, theyfind in moreunionizedindustries thatfirms have(1) lowerinvestments in capital and lowercapital-to-labor ratios,(2) lowerR&D investments, (3) lower advertising expenditures, (4) higherdebt and debt-equityratios,and (5) higherpayouts(dividendsand stock repurchases)and a higherratio of payoutsto retainedearnings.All union resultsare highlysignificant, the in theR&D and debt-equity magnitudeoftheunioncoefficients equations beingparticularly large. Hirsch (in press) providesa similaranalysisfordata on 315 Fortune 1,000firmsduringthe 1970s.This studyemploysa firm-level measureof union coverage(based on a 1972 survey)and includesdetailedindustry controlsin the regressionequations.Hirsch findsthatunionized firms investsignificantly less in researchand developmentand physicalcapital thando similarnonunionfirms.And in a recentstudyusingthe Ruback and Zimmerman(1984) electiondata,Bronarsand Deere (1987) findthat firmsdecreasecapitalinvestment and employment, whileincreasingdebt, elections(regardlessof the outcome) but followingunion representation findno conclusiveevidencethatR&D or advertising expenditures are affected. and decreasedtangibleand intangiblecapital inLower profitability vestments amongunion firmsare likelyto have a negativeimpacton the long-runproductivity growthof firms.This bringsus to what at first the sharplydifferentiated results appearsto be a puzzle in the literature: 13 Bronars dummiesor detailedindustry andDeere (1986) do notincludeindustry controlvariablesin theirregressions. 98 Addison/Hirsch ofproductionfunction studiesindicating positiveunionproductivity effects on the one hand,and the R&D-based productivity growthliterature on theother.Most R&D studiesthatincludea union argumentreporttotal factorproductivity growthto be negativelyassociated(but not always significantly so) withthelevelofunionism(e.g.,Terleckyj1974;Kendrick and Grossman1980;Mansfield1980;Link 1981;and Sveikauskasand Sveikauskas1982;but foran exception,see Clark and Griliches[1984])."4 But thereneed be no inconsistency betweenthe two sets of findings. Fromequation(3), a positivecoefficient on theunionvariablein theproductionfunctiontestimpliesthatunionizedestablishments have higher totalfactorproductivity. an attemptedreconciliationof the Accordingly, productivity and productivity growthliteratures mightproceedas follows: unionsincreasethe levelof productivity (perhapsthroughshock effects) butsubsequently retardproductivity growth,possiblyreflecting long-run responsesto decreasedprofitexpectations.An alternative but moreconventionalargumentwould be thatthe legacyor heritageeffects of union work rulesare negative.This is the argumentespousedby Maki (1983), in an analysisof thegrowthof totalfactorproductivity in Canadian manufacturing duringthe period 1926-78. Ignoringthe errorterm,Maki estimates the equation p = ao + aP + a2AP + a3S, (11) wherep is the annualgrowthrateof totalfactorproductivity, P is union density,and S is days lost throughstrikesdividedby total employment (we ignorecontrolvariables).The firstuniontermis supposedto pick up the long-termeffectsof unionismon growth,while firstdifferences in P are intendedto proxyimpactor shock effects. Maki findsthatthe shock effects are positiveand thelong-term effects are negative.For thevarious it takesfrom5 to 8 years(coefficient specifications, a2 dividedby a,) for theone-timepositiveeffectof an increasein unionizationto be offsetby thecontinuinglong-term effectof unionismin slowinggrowth. In a relatedanalysisof U.S. productivity growthin two-digitmanufacturingindustriesfrom1957 to 1973,Hirschand Link (1984) show thatif one specifiesthe standardCobb-Douglas model in difference form,then changesin totalfactorproductivity, p, shouldbe a functionof changesin union density,AP (see eq. 3). Since Hirsch and Link employ a three14 Hirsch (in press)findsproductivity the1970stobe slowerfor growth during companies withhighlevelsoffirm unioncoverage in 1972,although muchofthe slowergrowth canbe accounted forbycontrolling in detailforindustry effects. Theunioncoefficient in a productivity growth equationmeasures onlythedirect unioneffect, however; unionsaffect growth indirectly through theirimpacton investments incapitalandR&D. 99 Union Effects to includetechnicalcapital,theirestimating factorCobb-Douglasfunction equation(ignoringcontrolvariables)is p = X + 'D(dT/dt)/Q + (1 - a)(c - 1)AP, (12) whereX is the rate of disembodiedgrowth,ID is aQ/OT (the marginal into productof technicalcapital), dT/dt approximatesnet investments stock T, and (dT/dt)/Q is proxied by R&D intensity.They reporta on the union changevariable, negativeratherthana positivecoefficient to thepredictionof thecollectivevoice model.WhenHirschand contrary Linkalso includea levelofunionismvariable,bothP andAP arenegatively growth.The inferenceis, then, relatedto productivity and significantly (as reflectedin thatunionismnot only reducestotal factorproductivity increase." thesignon AP) but also slows therateof productivity growth on productivity unioneffects Finally,notethatstudiesestimating attemptto hold constantchangesin stocksof R&D and physicalcapital. growthhave The specificroutesthroughwhichunionsslow productivity not been examinedthoroughly.To the extentthatunions decreaseinthe vestmentin tangibleand intangiblecapital,these studiesunderstate growth.A fullaccounting negativeimpactofunionismon firmandindustry not onlyof unions' directeffects of theunionrole requiresmeasurement derivingfromtheir growth,butalso ofanyindirecteffects on productivity decisions(Allen 1986c; Hirsch,in press).16 impacton investment The ratherdivergentconclusionsreachedin the productionfunction thatunionsraise doubton thehypothesis castfurther and R&D literatures moreproIf unionizedfirmsand industriesare significantly productivity. ductive,ceterisparibus,shouldnottherebe evidenceoffasterproductivity growthin industriesand firmswhere unionizationhas grownmost or reducedinnovativeactivity, declinedleast?Evidenceof lowerinvestment, growthin moreunionizedsectorsshouldnotonly and slowerproductivity engendercaution in evaluatingthe evidencefromproductionfunction studies,but also shouldgiveriseto concernabout thelong-runimpactof Perhapsthe long runhas arrived. unionson economicperformance. on theHirschandLinkfindings to placeundueemphasis 15 We arereluctant thepossible ofobservations, number thelimited becauseofthelevelofaggregation, function production oftheconventional andthefragility ofunionism, endogeneity Allen(1986c) however, inconstruction, growth ofproductivity test.In ananalysis toboththeinitiallevelandchange related changeinversely productivity alsofinds (1984,pp. 169-71)contendthattherelaFreemanand Medoff in unionization. istooweaktodrawanydefinite andunionism growth productivity between tionship conclusions. impact, economy-wide 16 It isdifficult aboutunionism's conclusions todrawfirm frees fornonresources amongunionfirms andgrowth investment sincedecreased however; norcostless, instantaneous isneither movement Suchresource unionfirms. between union differences profit suchsignificant ifitwere,therewouldnotexist. companies. andnonunion 100 Addison/Hirsch V. Conclusions oftheburgeoning Ouranalysis literature unioneffects on investigating and growthhas exposeda numberof unresolved productivity, profits, issues.Statistical shortcomings and considerable ambiguity attachto the production function testsadoptedinthebulkoftheproductivity studies. Whileempirical evidence is mixed, thecontention thatunions, on average, raiseproductivity cannotbe sustained. Severalempirical significantly regularities inthisliterature, however, maybeexploited. First, positive union effects inindustries productivity tendtobemostpronounced whereunionnonunion wagedifferentials are large.Second,positiveeffects are more evidentwherecompetitivepressuresare present.And, relatedly,positive effects areabsentorquitesmallinthepublicandlesscompetitive sectorswithorwithout a unionwagepremium. thelinkbetween these Although is somewhat observed regularities shaky,sinceunionsareleastlikelyto inmorecompetitive obtainlargewagepremiums thefindings are settings, withbothshockeffect broadlyconsistent and selectivity explanations. Firmsin competitive environments are"shocked"intoproductivity improvements inthefaceofwageincreases anddecreased profit expectations. Andcompetitive ensurethatin theverylongrun,firms pressures must increase in orderto survive. productivity Thus,anycross-section sample willbe nonrepresentative, of firms sinceunionizedfirms notincreasing theirproductivity areleastlikelyto survive. The finding thatunionsreduceprofitability further callsintoquestion thesizableunionproductivity differentials in someof theproreported ductionfunction studies.Freemanand Medoff arguethatunionsreduce in general profitability becausetheirproductivity effects, thoughsubstaninsufficient inwagecostsandgreater increases tive,arenevertheless tooffset To thisis addedtheriderthatsinceunionprofit capitalintensity. effects are largelyrestricted to highlyconcentrated industries thelonger-term consequences ofthistransfer arebenign. Ourownreading ofthisliterature is thatmanyoftheproductivity results aresimply andprofit inconsistent; "true"productivity effects aremorelikelytobe closetozeroandnegative profit effects intheempirical maybe lessseverethansuggested literature. The conclusion thatunionscapture concentration-related is based profits on a fragile betweenprofitability, largely econometric conrelationship and unionismat theindustry centration, level.Corroborative evidence fromthelabormarket is lacking.Returns accruing fromothercorrelates ofmarketpower(e.g.,marketshare,foreigncompetition, and government andfrom entry restrictions) long-lived capitalappeartobemoreimportant sourcesofunionrents. Themanner inwhichunionrentseeking isofsomeimportance. proceeds Suchevidenceas we havebeenable to uncoverdoes notencourage an viewofunionism's Unionrentseekoptimistic longer-term consequences. andintangible ingat theexpenseoflong-lived tangible capitalappearsto UnionEffects 101 in physicalcapital,as well as to decreaseR&D lower firms'investment activities.As a consequence,proand otherinnovativeand risk-taking ductivitygrowthtendsto be slower in unionized firmsand industries. oppositionto unions,and decliningunioncoverage Increasedmanagement withinmostsectorsof theU.S. economy,appear to be and employment of highlyunionpoor performance predictableresponsesto therelatively ized companiesduringthe 1970s.More workis requiredhere,particularly of improveddata sets. But alreadythe locus of the in the construction debatehas shiftedtowarda considerationof unionism'sdynamiceffects on long-runeconomicperformance. References Abowd,JohnM. 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