Self‐Enforcing Union Contracts: Efficient Investment and Employment

Addison, John T.; Chilton, John B.

doi:10.1086/209748

“…unions (Hirsch, 1991a;1992b) find it optimal to tax capital when the time horizon of their members is short relative to owners' time horizon for long-lived, nontransferable capital (it need not follow from theory that the union always has the shorter time horizon; see Addison and Chilton, 1998). In response, firms rationally reduce their investment in vulnerable tangible and intangible capital until returns on investment are equalized across the union and nonunion (i.e., taxed and nontaxed) sectors.…”

Section: Investment In Tangible and Intangiblementioning

confidence: 99%

What Do Unions Do for Economic Performance?

Hirsch

¹

2017

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung) supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor, (2) internationalization of labor markets, (3) welfare state and labor market, (4) labor markets in transition countries, (5) the future of labor, (6) evaluation of labor market policies and projects and (7) general labor economics. Terms of use: Documents inIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available on the IZA website (www.iza.org) or directly from the author. This essay assesses their analysis of how unions in the U.S. private sector affect economic performance -productivity, profitability, investment, and growth. Freeman and Medoff are clearly correct that union productivity effects vary substantially across workplaces. Their conclusion that union effects are on average positive and substantial cannot be sustained, subsequent evidence suggesting an average union productivity effect near zero. Their speculation that productivity effects are larger in more competitive environments appears to hold up, although more evidence is needed. Subsequent literature continues to find unions associated with lower profitability, as noted by Freeman and Medoff. Unions are found to tax returns stemming from market power, but industry concentration is not the source of such returns. Rather, unions capture firm quasi-rents arising from long-lived tangible and intangible capital and from firm-specific advantages. Lower profits and the union tax on asset returns leads to reduced investment and, subsequently, lower employment and productivity growth. There is little evidence that unionization leads to higher rates of business failure...

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“…However, two theoretical caveats and a qualification are in order. First, Addison and Chilton (1998) have shown that union opportunism alone does not necessarily underpin suboptimal investments in physical capital and that -irrespective of the union's horizon or the productive life of capital -sufficient patience on the part of the firm can yield selfenforcing contracts that are efficient with respect to employment and investment. In other words, the efficient outcome may depend crucially on the firm's discount factor.…”

mentioning

confidence: 99%

Do Works Councils Inhibit Investment?

Addison¹,

Schänk²,

Schnabel³

et al. 2007

Self Cite

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. ABSTRACT Do Works Councils Inhibit Investment?Theory suggests that firms confront a hold-up problem in dealing with workplace unionism: unions will appropriate a portion of the quasi rents stemming from long-lived capital. As a result, firms may be expected to limit their exposure to rent seeking by reducing investments, among other things. Although there is some empirical support for this prediction in firm-level studies for the United States, we investigate whether this is also the case in the different institutional context of Germany where the works council is the analogue of workplace unionism. Using parametric and nonparametric methods and establishment panel data, we find no evidence that the formation (dissolution) of a works council has an unfavorable (favorable) impact on investment.JEL Classification: J50

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“…This would force even extremely short-minded unions to take into account that firm relocation is a real possibility (see Espinosa and Rhee, 1989;Addison and Chilton, 1998). Governments also seem to serve as an intermediate which enables unions to make credible commitments.…”

Section: Proposition 5 Under Full Agglomeration An Increase (Decreamentioning

confidence: 99%

“…When organised at the sector level, even short sighted unions should be aware that at any point in time at least a fraction of firms in the sector will be at the end of an investment cycle, such that some relocation will occur in response to wage increases. Moreover, if firms value future profits highly, then even with long-lived fixed localised investment where relocation would hurt the firm in the short-run, the threat of relocation becomes credible and relevant even to extremely myopic unions (see Espinosa and Rhee, 1989;Addison and Chilton, 1998). One example of such a strategy may be the decision of the Spanish car manufacturer SEAT (part of Volkswagen) to partially relocate the production of the SEAT Ibiza model from Martorell in Spain to Bratislava in Slovakia in 2003 after failed negotiations with unions.…”

Section: Introductionmentioning

confidence: 99%

Union Wage Demands with Footloose Firms

Persyn

¹

2009

SSRN Journal

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyses the wage demand of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model describes how firms relocate in response to international differences in production costs and market size. The union, in turn, sets wages as a function of the responsiveness of firms to relocate internationally. If the international differences in labour productivity and market size are limited then lower foreign wages and lower trade costs necessarily lead to lower union wage demands. If there exist large differences between the countries in terms of productivity and market size these intuitive properties do not always hold. Counter to intuition, small increases in market size or trade costs make the union wage more sensitive to foreign wages.

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Self‐Enforcing Union Contracts: Efficient Investment and Employment

Cited by 25 publications

References 14 publications

What Do Unions Do for Economic Performance?

What Do Unions Do for Economic Performance?

Do Works Councils Inhibit Investment?

Union Wage Demands with Footloose Firms

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