Labor unions may affect innovation negatively

An interesting paper by Daniel Bradley, Incheol Kim, and Xuan Tian got recently published in Management Science (link to the SSRN version):

We examine the causal effect of unionization on firm innovation. To establish causality, we use a regression discontinuity design relying on “locally” exogenous variation generated by elections that pass or fail by a small margin of votes. Passing a union election leads to an 8.7% (12.5%) decline in patent quantity (quality) three years after the election. A reduction in R&D expenditures, reduced productivity of current and newly hired inventors, and departures of innovative inventors appear plausible mechanisms through which unionization impedes firm innovation. Our paper provides new insights into the real effects of unionization and has important implications for policy makers when they alter union regulations or labor laws to encourage innovation.

The study is a nice example of a regression discontinuity design (RDD), which is used in order to identify causal effects. If you would just compare patenting of unionized firms with those that aren’t your analysis would be plagued by all sorts of unobservable confounders. For example, unionized firms could differ substantially in terms of organizational culture or product market strategies that likewise affect firms’ innovation activities.

The RDD avoids this problem by comparing only those firms in which union elections have been very close; e.g. 52% vs. 48% in favor of unionization or 49% vs. 51% against. Such small margins in terms of employees voting for or against unionization are most likely not the result of the above mentioned unobserved confounders but rather of chance alone. If that is the case, an RDD is able to eliminate the selection effect and any remaining, statistically detectable differences are directly attributable to a causal impact of unionization.

A drop of 8.7% in patent counts (12.5% when looking at citation weighted patents) is sizeable and the authors do a great job in exploring, both empirically and theoretically, the likely reasons for such a large effect. A couple of years ago we established a works council at ZEW. I hope that this didn’t have the same impact on our innovativeness too…

 

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