Trade unions and collective bargaining
A trade union, or labor union, is a group of workers who have formed to protect their professional rights and interests, e.g. negotiating higher wages, heath care, and pensions, and better working conditions, including workplace safety.
While union density—the share of workers who belong to unions—appears to be in retreat and not very high in most developed countries, many more workers are covered by collective bargaining agreements, especially in continental EU countries.
Theory differs on the economic impact of collective bargaining, although it clearly suggests that it raises pay per worker. But does it increase labor costs? It might increase worker productivity through collaboration with management and providing incentives. Or it might impose inefficient work rules, such us restrictions on laying off workers when technology changes, which reduce productivity and even affect workers who are not represented by trade unions.
When workers and firms cannot commit to long-term contracts and capital investments are sunk, union power can reduce investmentAlthough coverage of collective bargaining agreements has been declining for decades in most countries, it is still extensive, especially in non-Anglo-Saxon countries. Strong unions may influence firms' incentives to invest in capital, particularly in sectors where capital investments are sunk (irreversible), as in research-intensive sectors. Whether unions affect firms' investment in capital depends on the structure and coordination of bargaining, the preference of unions between wages and employment, the quality of labor-management relations, the structure of corporate governance, and the existence of social pacts, among other factors.MoreLess
Alternative dispute resolution Updated
Promoting accurate bargainer expectations regarding outcomes from binding dispute resolution is worth the effortDavid L. Dickinson, March 2023Alternative dispute resolution procedures such as arbitration and mediation are the most common methods for resolving wage, contract, and grievance disputes, but they lead to varying levels of success and acceptability of the outcome depending on their design. Some innovative procedures, not yet implemented in the real world, are predicted to improve on existing procedures in some ways. Controlled tests of several procedures show that the simple addition of a nonbinding stage prior to binding dispute resolution can produce the best results in terms of cost (monetary and “uncertainty” costs) and acceptability.MoreLess
Sectoral collective contracts reduce inequality but may lead to job losses among workers with earnings close to the wage floorsIn many countries, the wage floors and working conditions set in collective contracts negotiated by a subset of employers and unions are subsequently extended to all employees in an industry. Those extensions ensure common working conditions within the industry, mitigate wage inequality, and reduce gender wage gaps. However, little is known about the so-called bite of collective contracts and whether they limit wage adjustments for all workers. Evidence suggests that collective contract benefits come at the cost of reduced employment levels, though typically only for workers earning close to the wage floors.MoreLess
Declining union power would not be an overwhelming cause for concern if not for rising wage inequality and the loss of worker voiceJohn T. Addison, February 2020The micro- and macroeconomic effects of the declining power of trade unions have been hotly debated by economists and policymakers, although the empirical evidence does little to suggest that the impact of union decline on economic aggregates and firm performance is an overwhelming cause for concern. That said, the association of declining union power with rising earnings inequality and the loss of an important source of dialogue between workers and their firms have proven more worrisome if no less contentious. Causality issues dog the former association and while the diminution in representative voice seems indisputable any depiction of the non-union workplace as an authoritarian “bleak house” is more caricature than reality.MoreLess
Low coverage and greater fragmentation can limit the benefits of trade unionsIga Magda, May 2017Countries with strong industrial relations institutions and well-established social dialogue often perform well in terms of economic growth and social cohesion. The weak and fragmented bargaining and low levels of union coverage in Central and Eastern Europe (CEE) raise concerns about these countries’ potential to maintain competitiveness, tackle demographic and macroeconomic challenges, and catch up with Western European economic and social standards. There is evidence that unions in CEE continue to protect their members and generate wage premiums, despite their institutional weaknesses.MoreLess
Stronger wage coordination and higher union density are associated with lower unemployment and higher inflationRiccardo Rovelli, January 2016Aside from employment protection laws, which have been converging, other labor market institutions in new and old EU member states, such as wage bargaining coordination and labor union density, still differ considerably. These labor market institutions also differ among the new EU member states, with the Baltic countries being much more liberal than the others. Research that pools data on old and new EU member states shows that wage coordination mechanisms can improve a country’s macroeconomic performance. Stronger wage coordination and higher union density reduce the response of inflation to the business cycle.MoreLess