Industrial Relations Journal ISSN 0019-8692 S3.00

Trade unions and productivity: theory and evidence

Samuel Cameron

Recent work by economists has generated new theories of the impact of trade unions on productivity. This article gives an exposition of these theories and assesses the extent to which they are supported by

empirical evidence.

Introductory courses on economics tend to give a biased view on the economic effects of trade unions. Students are first introduced to the perfect competition model in the context of the commodity market. Folowing this it is usually demonstrated that, other things being equal, monopolistic firms are ‘bad‘ in that they restrict output and charge higher prices than competitive firms. This is quickly qualified by pointing out that monopolistic producers may be necessary to capture economies of scale and ensure that risky, but potentially highly fruitful, research and development is undertaken. When we move to the labour market it is depicted as openly competitive with upward-sloping supply curves and downward-sloping demand curves. Trade unions are depicted as an intrusion into this scenario being monopolists who restrict supply in order to drive up the price (wages) of labour. Curiously this is not followed by any enu- meration of the ’good’ things that may follow from unionisation of the labour force. Typi- cal of this is the statement in the most recent major introductory text, of UK origin, that, ’The general qualitative conclusion is that unions can increase members’ wages but only at some (long run or short run) cost in terms of job losses’[l]. The author fails even

El Samuel Cameron is Lecturer in Economics at North Staffordshire Polytechnic.

to hint at the possibility that unions may enhance productivity in order that wage gains can be self-financing. The basic ’mon- opoly’ concept of trade unions is a stock element of populist writings by right-wing economists[2]. Fortunately, two Harvard economists have, in recent years, provided a coherent easily understood exposition of the alternative view which has now been enshrined in book form[3]. One of the merits of Freeman and Medoff‘s book is that they support their arguments with evidence and attempt to meet directly the criticisms which have been made of their work. Our purpose here is to provide a simple exposition of Freeman and Medoff’s views and a compre- hensive and up to date survey of the evi- dence bearing on them. We should caution that Freeman and Medoff are not the first to advance the view that unions may promote productivity; nineteenth century writers such as Thomton, Owen and the Webbs advanced the view that the higher wages following from unionism might generate productivity gains - a view more recently expressed by Burkitt[4]. However, Freeman and Medoff are the first to use conventional econometric methods to support the pro- union case.

The resource model of trade unions The resource model does not deny that union leaders are interested in procuring better

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wages and conditions for their members. It stresses that the introduction of unions to a workplace may raise productivity to an extent that compensates, or even exceeds the rise in wages brought about. In the monopoly model unions and employers are fighting over their share of a fixed pie whilst in the resources model it is possible for co- operation between the two to increase the pie so that both can gain. The possibility of gain to both parties emerges from the expectation that employment relationships will typically be of long duration. In a long- term contract workers will benefit from the opportunity to communicate dissatisfaction about conditions. Such benefits are of greater moment where decision-making is in terms of groups rather than individuals. If there is no 'voice' mechanism the only alternative available to workers is to quit in search of a better employer. Quitting is regarded as the 'exit' mechanism. Voice can be vital to employers in the group work context because the same conditions are imposed on large numbers of workers; further if the group are engaged in team production there will be severe disruption from losing a member of the team. Unions can benefit both workers and employers via the voice mechanism. Workers can have higher wages and greater job satisfaction whilst firms can have higher profits from improved productivity arising from the improvement in workers' morale and the cost saving effects of lower quit rates. It should be borne in mind that the scope for workplace gains from union activity may be circumscribed by wider historical and technological factors. The dis- cussion above rests implicitly on the belief that the jobs concerned are in the 'core' or upper segment of the labour market where there are elements of skill and progression. For workers in low-skill, usually part-time jobs, the voice mechanism can do little a s it can not alter the job content. In any case firms have little incentive to introduce voice, in such jobs, as there are few benefits from retaining workers. Indeed their retention may prove undesirable because of separation costs when there is falling product demand - with a high quit rate, falling demand is easily met through natural wastage.

There may be a number of vehicles for articulating worker preferences. Why should trade unions be the dominant method? Firstly, it is cheaper to deal with workers'

grievances collectively provided that there is reasonable communality in their prefer- ences. Secondly, as many of the benefits of voice are collectively shared the incentive for individuals to lobby is relatively weak compared with the collective incentive. If there were no union organisation the wor- kers would face considerable organising costs every time an issue arose. With a permanent organisation, organising costs can be reduced partly through spreading them over a sequence of issues.

Aside from representing the preference of workers, unions are said to make firms more efficient due to the 'shock effect' of higher wages. Higher wages mean higher costs and thus generally lower profits so that firms will be stimulated into eliminating slack a t various levels of the organisation.

The above arguments specify the possi- bility of productivity gains from unionis- ation but they do not ensure that they will be realised. One counter-argument is that these arguments pre-suppose managerial inefficiency in the first place[5]. If firms are devoted to cost-minimising then they will, in the absence of prohibitive information- gathering costs, do all the good things that unions are supposed to do. Freeman and Medoff's rejoinder to this is to claim that the profit-maximising model of the firm is unrealistic and should be replaced by the 'managerial' model[6]. In this model the ownership of firms is separated from control. The ultimate owners can not readily monitor the behaviour of the operators of firms who can, in consequence, shirk in their own work and promote inefficiency. I t should be noted that controversy rages in this area with some authors now claiming that the 'M- form' corporation can eliminate most of the inefficiencies of managerialism[7]. A second counter-argument is that there is no guaran- tee that union goals are compatible with increasing labour productivity. This is essentially a simple restatement of the mon- opoly view - ie if unions simply want as big a pay-off as they can get then they will be happy to achieve it by going for a bigger share of the pie rather increasing the pie.

The root of the two divergent views of the economic effects of trade unions is disagree- ment as to whether capitalist production is primarily co-operative or conflicting. The root proposition can not be tested by experi- ence. However it is possible to infer

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something about the veracity of the root propositions from the observable changes in economic circumstances attendant upon unionisation. In general this is not quite what happens. Rather than analyse unionis- ation’s impact in a ’before and after’ manner most studies compare outcomes of firm/ industries at different levels of unionisation holding other factors constant. I t will be immediately apparent that there is scope for arguing that differences in unionisation rates actually measure some indirect effect of unions on the quality of the labour force or production process. I t is thus important that these sorts of factors are held constant in an appropriate way when making com- parisons.

Evidence

Productivity differentials

In a paper pre-dating the Freeman-Medoff analysis Mandelstamm compared pro- ductivity in union and non-union construc- tion firrns[8). To his surprise productivity was higher in the union sector. He examined the following possible explanations - differ- ences in production techniques, differences in work rules, differences in worker quality, entrepreneurial efficiency, and capital-lab- our substitution. A number of these possi- bilities are seen as arising from the impact of unions on wage levels. After weighing his evidence in a somewhat subjective manner, Mandelstamm concludes that ’. . . the net effect of unions on efficiency was probably favourable in the areas under survey’[9].

Mandelstamm’s work defines an agenda for the research of the late 1970s and early 1980s. In this, the influences he identified were measured and controlled for in multiple regression analysis which includes the per- centage of the workforce unionised as a measure of the extent of unionisation. The productivity variable to be explained is usu- ally value added per worker. A positive and significant correlation of this with trade union density supports the Freeman-Medoff view of trade unions whilst a negative, significant correlation supports the older ‘monopoly’ view. In order that such corre- lations be accurately estimated we must include the other determinants of pro- ductivity differentials in the regression equ- ation. The determinants identified in the research studies are the capital-labour ratio,

labour quality, and in some cases the quit rate. The latter variable is expected to fall as union density rises so that i t is not genuinely ’independent’. Inclusion of the quit rate means that some of the differential due to union activity will be attributed to i t and some to the miscellaneous consequences of increasing union presence such a s improved management, morale and communications. Brown and Medoff (1978) find that 20% of the differential is due to the quit rate and 80% to the other factorsll0). Adjustment for quality variations in capital and labour have made little difference to estimated pro- ductivity differentials which, according to the tables in the Freeman and Medoff book can be as large a s 39%. Most studies indi- cate substantial gains although some find small negative effects. In criticism of Free- man and Medoff, Addison and Maki, have independently drawn attention to the find- ings of other researchers that the level of union density is negat ive ly related to productivity growth[ll]. Freeman and Medoff (pp. 169-172) re-work the data sets used in their book finding negative but statistically insignificant correlations of union density with productivity growth. Curiously they make no reference to the anomalous findings of other researchers using different data. I t is possible to reconcile the conflicting findings wi th in the data by arguing that unions raise productivity in a once-and-for-all manner in which case the level of membership should have no impact on the rate of change of Product iv i ty .

Although i t conflicts with the evidence on productivity growth the positive union- productivity level relationship seems well established - indeed a new study of the construction industry, in the USA is support- ive[l2]. A substantial drawback of the stud- ies cited above is that they use an equation which assumes that the productivity enhanc- ing effect of unions does not operate via a change in the ratio of the marginal pro- ductivities of union and non-union labour. A consequence of this formulation is that the share of labour, in income, is assumed to be constant across firms and over time. The literature of the economics of distribution reveals a long history of dissatisfaction with constant factor shares and the use of pro- duction functions(l3]. One might well argue that a non-constant shares production func- tion should be used. This will give new estimates of the impact of trade unions on

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productivity. Maki's study, using Canadian data, finds similar results to Freeman and Medoff using the constant shares approach; he adds a term which allows the labour share to rise with unionisation with the dramatic consequence that the union effect becomes substantially negative. While this casts doubt on Freeman and Medoff's work we should bear in mind that we have no guaran- tee that Maki's specification is the correct one.

Profits

If unions raise productivity then the gains may compensate or even exceed cost rises from wage gains. I t follows that i f unions are a 'good thing' then they should, at least, not lower the profitability of their host companies unless there is some social benefit from falling profit in certain sectors. There appears to be a consensus, in the research, that unionisation is associated with lower profits. Returning to the issue of social ben- efit i t is important to know which firms suffer the greatest loss of profits. Profitability does not automatically connote greater efficiency, given that some part of profits may arise from monopoly power that is a form of 'economic rent' which has no necessary relationship to output.

Studies of the association of profits with unionisation show striking differences between monopolised and competitive industries. Freeman and Medoff cite evi- dence showing no effect in the competitive sector but a negative one in the monopolistic sector. Their critic, Addison, cites evidence showing the opposite[l4]! This study, by Clark, is cited by Freeman and Medoff to show that company growth is positively associated with unionisation in the competi- tive sector but negatively in the monopolistic sector. Addison conveniently overlooks this aspect of the Clark paper.

On Freeman and Medoff's interpretation of the evidence unions benefit society by reducing monopolist's profits which diverts investors' funds to more competitive enter- prises. On Addison's interpretation unions are harmful as they drive competitive firms to bankruptcy so that their long-run effect is to increase the degree of monopoly in the economy. As indicated in our introduction the move to greater competitiveness is not automatically a good thing as there may be gains from monopoly such as research and

development induced cost reductions which could outweigh the productivity gains from the unionisation.

Strikes

A common anti-union view is that unions are highly detrimental in calling strikes which impose costs on innocent victims and cause the loss of valuable national output. Freeman and Medoff devote only three and a half pages to this issue and come to the conclusion that '. . . while costly to those involved, strikes cost the economy relatively little in terms of lost output'[l5]. They make no attempt to analyse the effect of unions on strikes from the perspective of the exit- voice model on which their case rests nor do they provide any evidence on the relationship between the number of strikes and the level of union membership. Their perspective seems to be that strikes do not matter therefore i t does not matter whether they are caused by unions or not. I t is hard to sustain such a view for even i f strikes are negligible in terms of social cost they can still be used to provide more tests of the legitimacy of the exit-voice model of unions. Given that this model is supposed to provide profound insights into the effect of worker organisation i t should surely yield some implications for its effect on strikes.

It could be argued that strikes are a mani- festation of collective voice therefore greater unionisation should lead to more strikes(l61. It seems more in keeping with Freeman and Medoff's ideas to link strikes with their discussion of the 'industrial relations cli- mate'. This is an intervening variable between unions and productivity. If union membership improves the industrial relations climate productivity rises and vice- versa. This seems a mite woolly being just a back door method of allowing managerial response into the picture. It runs the risk of allowing the authors an escape clause for any counter-evidence to their thesis unless it is possible to pin down the climate variable in the form of some index which can be measured with tolerable accuracy. To this end, Freeman and Medoff refer to some work correlating productivity with the number of grievances filed by workers. Surprisingly they fail to note the contradiction between this and their treatment of strikes which they clearly see as indices of the industrial relations climate as revealed by their

Trade unions and productivity 173

comment that: ’Instability in underground coal mining reached such a state that in 1976 there were 1,383 work stoppages - over ten times the number fifteen years earlier’ll71. One can, for instability, read ’poor labour- management relations’, without doing any injustice to the original intent in the quote.

We have then a case for examining the evidence on unions and strike frequency even i f we accepted that the output effects of strikes are inconsequential. Orthodox economists have given little attention to union membership as an influence on strikes due to their belief that membership changes simply mirror underlying changes in inflation and unemployment which are the ‘real’ determinants of strike frequencyll81. In contrast a number of political scientists, historians and sociologists have adhered to a ’political‘ model in which strikes are a manifestation of working-class mili- tancy(l91. The collective organisation of wor- kers facilitates the expression of militancy in part through providing the resources needed to back it up. We have then diverse predictions about the relationship between unions and strikes. The Freeman-Medoff view predicts a negative impact, the political model a positive one whilst the orthodox economist is agnostic.

Early work on unions and strikes was generally on time-series data and would thus reflect short-run effects. Shorter and Tilly, using French data for 1830-1968, found union membership and strikes to be strongly positively correlated over most sub- periods(2Oj. Cronin, Hunter and Cameron, using British data for 1892-1974, find, for the most part, strong positive relationships[21]. The 1985 paper by Cameron finds that the impact of unions on the number of strikes is increasing over time. His estimates for the more recent data show that a 1% increase in the percentage of the labour force union- ised is associated with a rise in strike fre- quency in the range 7-10%. Similar analyses for the USA and Canada give the impression that a positive relationship holds u p to 1950 after which there is no relationship(221.

Some recent work uses cross-section data which should generate estimates indicative of long-run effects. A UK study, using indus- try level data fails to find a relationship of the percentage of workers covered by collective agreements to the number of strikes although there is a weakly significant negative relationship for the number of

strikers involved in a strikel23). USA evi- dence shows resoundingly significant posi- tive effects of unions on strikes when data on individual collective agreements or at industry level is used(24). Canadian studies using industry data find no effect whilst those using individual collective agreements show some weakly significant negative effects[ 25).

To a certain extent the variability in the above results may reflect underlying differ- ences in behaviour across nations and over time. Nonetheless the overall impression is not favourable to the Freeman-Medoff world view. Of a large number of studies only three find some support, at the 10% significance level, for the existence of a negative union- strikes connection while there is a lot of strong support for the opposite except in Canada(26). Accepting the frequency of strikes as an index of the industrial relations climate implies, then, that the growth of union membership usually worsens the industrial relations climate. If i t is essential that the climate brightens before pro- ductivity gains are realised then the picture for Freeman and Medoff is rather bleak.

Summary and conclusions

A scenario has been suggested in which trade unions can be seen as socially bene- ficial. I t is recognised that the benefits accrue along with costs in terms of cost increases and profit declines. There is thus a purely empirical issue as to whether the benefits are greater than the costs. The benefits in the shape of productivity gains do not arise from union membership per se but rather from changes which may follow from union membership. In general research has focused on ascertaining whether productivity has risen rather than looking to see if the changes alleged to follow from membership have arisen. A rare exception to this is Toner’s study of employees which finds little belief that improved voice follows from unioniz- ation of the workplace[27]. Evidence like this is subject to the rejoinder that there was an unfavourable industrial relations climate engendered by management opposition. Regarding this, the evidence from the strikes literature is that the industrial relations cli- mate worsens with unionisation. O n e might take the view that it is ultimate outcomes which really matter so we should look at productivity gains rather than things like

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industrial relations climate or workers' per- ceptions which can not be accurately meas- ured. Studies of outcomes which look a t the level of productivity appear to give conclusive evidence of favourable union effects even when other influences on pro- ductivity are controlled for. Unfortunately the measure of the effects in these studies is usually based on an equation which embodies the assumption that wage and profit shares are constant a t all times. The finding of favourable effects is further under- mined by studies of productivity growth which reveal a negative association with union membership.

What can we say in conclusion? Firstly, i t is welcome that an economic model favour- able to trade unions has been articulated as this provides some balance to the traditional right-wing attack on unions as a workers' cartel which strangles enterprise. Deciding which model is more accurate is not a simple matter. In keeping with contemporary aca- demic convention data is assembled and statistical tests carried out in an attempt to show that one view is right or the other wrong. As is always the case, some of this evidence points one way and some the other. This is, in part, because any individual study usually embodies the properties of one data set whose characteristics can not necssarily be regarded as universal. This problem can be minimised by estimating the same stat- istical models on a wide range of data sets. To some extent Freeman and Medoff have done this. However a difficulty remains in that different bits of evidence - on productivity, productivity growth, company growth, profits, profits by degree of mon- opoly, the industrial relations climate etc. are plucked out of the air at various points. Perhaps what is needed are studies which measure all of these variables simultaneously in a multiple equation model. This will require some combination of case study or questionnaire and conventional econometric methods.

On a cynical note one may doubt whether the above feat of scientific integrity would settle the argument. Empirical evidence rarely reverses an underlying conviction. The underlying convictions here are - for the monopoly model the belief that managers should manage and workers will be better off if they obey and for the resource model the belief that co-operation at the workplace brings the socially most desirable outcome.

Thus we may simply be observing the machinations of supporters of authoritarian and pluralistic systems fighting i t out on the particular topic of labour relations.

Acknowledgements

The author is grateful for the comments of a referee which assisted in the improved presentation of this paper. Remaining deficiencies are his sole responsibility.

References

1 . Culyer, A.J., Ecoriorriics, Blackwell, 1985. p. 312.

2. See eg Institute of Economic Affairs, Trritfc Urrioris: Public Goods o r Publ ic Bnds. lnsti tu te of Economic Affairs, 1978., Minford, P., Trade Unions Destroy a Million Jobs, /oirr-nril of Econorriic Affairs, 2 , 1982 January pp. 73-9, Hutt, W.H., The 'Power' of Labour Unions, in Anderson, M . J . (ed.), T/re Urifirris/rc*tf Atycirdti, Institute of Economic Affairs, 1986.

3. Freeman, R.B. & Medoff, J.L. What Do llriroris Do?, Basic Books, New York 1984.

4. Burkitt, B., Excessive Trade Union Power: Existing Reality or Contemporary Myth, Iridirs-

triril Rclotions /ournnl 12 (3) 1981, pp. 6571: for Thornton, see Thornton, W., 0 1 1 Laborrr, 2nd ed. Macmillan, 1870, Bk. 111 Chs. 111-V, for Owen, see Ch. 2 of Burki t t , B., Radical Politicti/ Econorriy, Wheatsheaf Books, 1984 and for the Webbs, Webb, S. B., lntf irs tr inl Derriocrocy, Longmans Green, 1902.

5. See Addison, J.T., The Evolving Debate on Unions and Productivity, / o n m a / of Indrrs~rrn l Relatioris 25 (3) 1983 September pp. 286-300.

6 . Freeman & Medoff, pp. 11-12. 7. See Williamson, OE. h Ouchi, W.G. The

Markets and Hierarchies Program of Research: Origins, Implications, Prospects. In Joyce, W. Van de Ven, A. (eds), Organizn/ionnl Design. New York, Wiley, 1981.

8. Mandelstamm, A.B., The Effects of Unions on Efficiency in the Residential Construction Industry: A Case Study, lriditstrinl arid Labor Rclafions Rev iew 18 (4) 1965 July, pp. 503-21.

10. Brown, C. & Medoff, J.L., Trade Unions in the Production Process, journal of Political Econorny, 86, 1978, pp. 355-78.

11. Addison, op. cit.; Maki, D.R., Trade Unions and Productivity: Conventional Estimates, Relations Industrielles/Industrial Relations

12. See, Allen, S.G., Unionisation and Pro- ductivity in Office Building and School Con- struction, lndustrinl and Lnbor Relations Rev iew 39 (2) 1986 January.

9. ibid., p. 521.

38 (2) 1983 July, pp. 211-28.

Trade unions and productivity 175

13

14

15 16

17 18

19.

20.

21.

On the history of such discontent, see Bron- fenbrenner, M., lricorrie Drstrrbrrtion Tlicory, MacMillan, 1971. Addison cites Clark, K.B., Unionization and Firm Performance: The Impact of Profits, Growth and Productivity. Working Paper HRS 83-16. Harvard University, 1982, January, and Ruback, R.S. & Zimmermann, M.B. Unioniz- ation and Profitability: Evidence from the Capital Market. mimeo. Sloan School of Man- agement, Massachusetts Institute of Tech- nology, 1982. Freeman and Medoff cite some of their own work although they cite the two studies above on the general issue of a negative effect on profitability. Freeman & Medoff, 1984, p. 220. See, eg Cameron, S., Strikes and Unemploy- ment: A Reply, Polrtrcnl Qrtnrtcrly 56 (3) 1985, July-September, pp. 279-81. Freeman & Medoff, 1984, p. 178. Economists generally regard strikes as acci- dents caused by a lack of information, see eg Addison, J.T. & Siebert, W.S. Are Strikes Accidental?, Economic lorirnnl 91 (362) 1981, pp. 389-404. In this view unions will only exhibit an influence on strikes if membership is associated with differential shifts in the perception of information by union leaders and management. See Shalev, M., Trade Unionism and Economic Analysis - The Case of Industrial Conflict, Journal of Labor Research l ( 1 ) 1980, pp. 133-73 for as review of the different models of strike activity. Note that the term 'political model' was earlier, and somewhat inappropriately, used by economists who did not include a union membership variable. Shorter, E. & Tilly, C.. S t r i k e s in Francc 7830-1968. Cambridge University Press, 1974. Hunter, L.C., The Economic Determinants of Strike Activity: A Reconsideration. University of Glasgow, Department of Social and Econ- omic Research. Discussion Papers in Econ- omics, 1, 1973. Cronin, J., Industrial Conflict in

Moifcrrr Britniri, Croom Helm, 1979, Cameron, 5. The Stability of the Post-War Aggregate British Strike Function, Scottish /ourrial fo Politicti1 Ecoiroury 31 (1) 1984, February pp. 33-43, Cameron, 5. Historical Variations in the Impact of Union Density on Strike Frequency: Some UK Evidence, Rrlntioiis Indic- s f r i~ l l z s / lndrr s~r in l Relations 40 (2), 1985,

22. See Frank, J.A., Kelly, M.J. & MacNaughton, B.D., Legislative Change and Strike Activity in Canada, 1926-1974, Rclnfions Industricllesl lntfrrstrinl Rclnliorrs 37 (2) 1982, pp. 267-283 and Kaufman, B.E., The Determinants of Strikes in the United States, 1900-1977, Irrdus- rritil 1 1 r i i 1 Lnbor Rclntions Rcuiciu 35 (4), 1982, pp. 473-90.

23. Creigh, S. & Makeham, P., Variations in Strike Activity Within U K Manufacturing Industry, lrrditstrid Rclritioris /oirrrrnl 11 (5). 1980,

24. For the former, see Gramm, C.L.. The Deterrni- nants of Strike Incidence and Severity: A Micro-Level Study, ltidrrstrinl nnd Lnbor Rdtrt iorrs Rcuitro 39 (3). 1986, pp. 361-76 and, for the latter, Kaufman, B.E., The Determi- nants of Strikes Over Time and Across Indus- tries, /oirrrrnl of Lribor Rcscnrrlr 4 (2), 1983,

25. For the former, see Maki, D. & Strand, K., The Determinants of Strike Activity: An Inter- industry Analysis, Rclatiotrs Iridrtstriellcsllndus- trinl Rzlntiorrs 39 (l), 1984, pp. 77-91 and, for the latter, Swidinsky, R. & Vanderkamp, J., A Micro-Econometric Analysis of Strike Activity in Canada, Iourrrnl of Lnbor Rcsenrc-h 3 (4), 1982, pp. 45971.

26. Creigh & Makeham, Swidinsky & Vander- kamp and Kaufman (1982).

27. Toner, B., The Unionization and Productivity Debate: An Employee Opinion Survey in Ireland, British /o i rrnnl of Industrial Relations

pp. 367-70.

pp. 32-7.

pp. 159-74.

23 (2) 1985, July, pp. 179-202.

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