Labour unions have played a significant role in the economies of Canada,
the United States, and Europe for many years. It is therefore surprising
how little economists actually know about the details of how unions
influence economic outcomes. One important unanswered question is
how unions affect long-run productivity.
Unions may reduce long-run productivity through a process known as the
hold-up of capital. Much physical capital, once it is installed, is very
difficult to move or resell. For this reason, installed capital has a very
inelastic supply and, following the discussion from Chapter 13 , a large
part of its factor payment takes the form of economic rent. The union may
be able to extract these rents from the firm in the form of higher wages.
That is, once the firm has already installed its capital equipment the union
may be able to hold up the firm by forcing it to pay higher wages; the firm
is stuck with its installed capital and thus pays the higher wages and, in
turn, receives lower profits. If firms are forward-looking, however, they
can anticipate this sort of behaviour from unions before making such
investments in physical capital. The possibility of being held up by union
wage demands reduces the expected profitability of investment and may
result in a reduction in investment. This decision to make fewer
investments in physical capital would likely have negative implications
for productivity growth in the industry.
There is some empirical evidence that the presence of a union does
reduce investment by firms. It is not yet clear, however, whether such
reduced investment has long-term effects on productivity. This issue is
currently unresolved.