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Article Excerpt
A number of conflicting theoretical hypotheses have been advanced regarding the impact of unions on investment behaviour. The net impact of unions on investment is thus an empirical issue. In this article, the available empirical literature is reviewed. In addition, new evidence of the impact of unions on investment is presented using French data. In contrast to previous studies, both aggregate and disaggregate measures of union activity are used. The results indicate that French unions, in general, have not had a negative impact on investment behaviour. However, there is some evidence that the more militant unions have a negative impact on investment.
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The influence of industrial relations and of unions, in particular, on the capital formation process has received a great deal of attention. There is disagreement about the theoretical impact of unions on investment behaviour, and some of the empirical evidence is contradictory. The aim of this article is to offer a quantitative review of the evidence. In addition, we present new estimates of union impact on investment. This study is undertaken using a large sample of French firms. Most of the existing studies have used U.S. data, and find a negative association between unions and investment. In general, analysis of French data does not support the negative findings for the U.S.
The article is set out as follows. In the next section, we briefly review the theoretical arguments. The quantitative review is presented in the second section. The distinctive characteristics of French unionism are discussed in the third section. Comparisons with the U.S. industrial relations system are also made in this section. New estimates using French data are presented in the fourth section, followed by the conclusion in the last section.
THEORETICAL CONSIDERATIONS
Early contributors to the union-investment effects literature include Baldwin (1983) and Grout (1984), with more recent contributions made by Hirsch (1991), Hirsch and Prasad (1995) and Addison and Chilton (1998). The starting point is the debate between the traditional and the union-rent seeking models. In the traditional model, union wage increases act as a tax on labour inducing both substitution and scale effects. Unionized workers tend to enjoy a wage differential (Jarrell and Stanley 1990; Kuhn 1998). This wage differential induces a substitution of capital for labour that stimulates investment in unionized firms. Higher production costs, however, discourage production. This scale effect results in lower investment levels (Johnson and Mieszkowski 1970). The net effect is expected to be often positive.
In the rent-seeking model, unions are said to capture at least some of a firm's quasi-rents from capital investments. This is a tax on capital. Long-lived assets are vulnerable to rental expropriation, not just by workers, but also by any party that is able to do so. (1) Employers are reluctant to invest in vulnerable assets if unions are able to capture quasi-rents. Machin and Wadhwani (1991) note that higher levels of investment are likely to raise future wage demands, thereby increasing the cost of investing. Van der Ploeg (1987) argues that unions may announce low future wage demands in order to induce films to invest, but may subsequently renege on this promise. However, Cavanaugh (1998: 36) notes correctly that "the bargaining problem exists only in the presence of both high union density and asset-specific investment."
Unions may stimulate investment through other channels. For example, Marxist and radical economists argue that the capitalist strategy to control the labour process is such that employers have an incentive to substitute capital for labour, independently of wage movements. The nature of industrial relations is also likely to be a factor. Where management and unions cooperate and bargain in terms of a win-win strategy, then a favourable investment climate is generated. Where bargaining is confrontational, then the investment climate will be poor. According to efficient bargaining models (e.g. McDonald and Solow 1981), firms are able to move off their demand for labour curves. Hence, it may be possible for the firm and for unions to collaborate in order to maximize the present value of the firm, a proposition that other authors argue is against the interests of a rationally myopic union (Hirsch and Link 1987). However, Hirsch and Prasad (1995) argue that even with efficient bargains, union activity is a tax on capital that will depress investment.
In the Freeman and Medoff approach (1984), unionized firms may experience a more productive working environment, with the retention of higher skilled workers, mechanisms for voicing worker grievances and improved communication channels. Such an environment may well induce additional investment. However, Hirsch and Link (1987) point out that the productivity effects need to be sufficiently positive if they are to offset the union tax on investment. Given these conflicting theoretical arguments, it is clear that the net impact of unions on investment is an empirical issue. (2)
QUANTITATIVE REVIEW OF THE EVIDENCE
Compared to the very substantial literature on union-productivity effects, there have been relatively few empirical investigations on union-investment effects. (3) An extensive computer based search was conducted revealing a total of only 14 empirical studies exploring the links between unions and physical investments. These studies are listed in Table 1, together with the sample size, the country investigated, the time period of the data and the measures of unionization and tangible assets. Two studies are not included in our quantitative review as they present probit estimations and, hence, are not comparable with the rest of the literature (Machin and Wadhwani 1991; Drago and Wooden 1994). A third article by Denny and Nickell (1991) uses identical data as their (1992) article, with very similar results. This article is also not included in the quantitative review. (4)
Two different measures of the union-investment impact are presented in Table 1. The partial correlations were estimated from each study and are presented in column 7. These measure the correlation between unions and investment, after controlling for other factors that may impact on investment. The total investment effects are presented in column 8. These reflect the impact of 100 percent unionization, and can be calculated for most of the studies. A union dummy measures the impact of 100 percent unionization. Studies using union density were evaluated at 100 percent union density/coverage. The works councils dummy is a proxy for union presence and is also treated as a 100 percent unionization measure. As can be seen from Table 1, with the exception of the French study by Coutrot (1996), all productivity effects are either negative or zero.
Meta-analysis can be used to combine all the studies in order to calculate an average union-investment effect. This represents a synthesis of the available evidence and a quantitative overview of what researchers have established (Hedges and Olkin 1985; Hunter and Schmidt 1990; Wolf 1986). Meta-analysis can be applied to a small group of studies, as long as that group represents the population of studies available. It is standard practice in meta-analysis to include studies that use different measures of the dependent and independent variables. Union coverage, union density and union dummies are all different ways of measuring union activity and union presence. In many cases, researchers have no choice in measurement and must use the data that is available. Significantly, some researchers have found no difference in results when different measures are used. This is the case with the econometric results presented in this article. The inclusion of studies from different countries is acceptable also. (5) While the studies differ in many respects, they all share a common exploration of the links between unions and investment.
Average Union-Investment Effect
The average impact of unions on investment for all the available studies is presented in the top part of Table 2. These averages are the central tendency of the findings of this group of studies. Column 2 reports the raw unweighted averages. In addition to the unweighted averages, two weighting regimes were used. The first uses sample size and the second uses a citations index, drawn from the Social Science Citations Index. Larger studies should be given greater importance. (6) Sample size is our preferred way of assigning weights to the studies, as sample size is a more objective approach to assigning weights. Because of the qualitative difference in the result reported by Coutrot (1996), we present averages with and without Coutrot. As can be seen from Table 2, the overall average partial correlation coefficient is negative (-0.07), regardless of the weighting regime. The average of the total union-investment effects ranges from -13% to -17% if the Couiot study is included (see the figures in squared brackets), and -14% to -23% if this study is excluded. Thus, the literature identifies an...
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