Unions No Longer Reduce Company Profits

The negative effect of trade unions on company profitability was dramatically reduced during the 1980s as a result of government anti-union legislation. According to research by Naercio Menezes-Filho, published in the latest issue of the Economic Journal, in 1984, the average firm that started recognising unions could expect to see its profits fall by 41%. But by 1990, the impact of union recognition on profitability was very close to zero. Combining Menezes-Filho''s findings with recent work by Paul Gregg and Steve Machin produces a fascinating picture of the impact of unionisation. It seems that unionised firms had a burst of productivity in the 1980s, which was not captured by union members in the form of higher wages. This led to an increase in the relative profitability of unionised firms.

At the same time, the average union worker still obtains a wage premium over his or her nonunionised colleagues. The conclusion therefore is that one of the effects of the anti-union legislation has been to reassert managerial prerogatives in industrial relations. Unionised firms are no longer less productive than non-unionised ones; and the higher wages obtained by union members are not directly translated into lower profitability for unionised firms. Menezes-Filho''s study uses firm level data and an industrial relations survey, to examine what has happened to the power of trade unions to redistribute a portion of firms'' profits to their workers over the 1980s. During this period, there were two main changes in the law on unions: first, the Trade Union Act (1984) introduced the need for a favourable majority decision in secret ballots on industrial action; and second, the Employment Act (1988) outlawed the closed shop and outlawed disciplinary measures on union members who refuse to join an industrial action. One of the effects of the anti-union legislation may have been to increase unions'' uncertainty about their members'' willingness to participate in an industrial action. Menezes-Filho develops a model which predicts that this uncertainty would tend to increase the profitability of unionised firms compared to the non-unionised ones.

The above diagram illustrates the changes in the union effect on profitability over the course of the 1980s. The numbers on the vertical axis indicate the percentage change in profitability an average firm would incur if it started to recognise a union. In 1984, this effect was in the order of minus 41% but by 1990, it was very close to zero and completely insignificant.

''Unions and Profitability over the 1980s: Some Evidence on Union-Firm Bargaining in the United Kingdom'' by Naercio Aquino Menezes-Filho is published in the May 1997 issue of the Economic Journal. Menezes-Filho is attached to the ESRC-funded Centre for Economic Performance at the London School of Economics.