Unions and Economic Performance in Developing Countries: Case Studies from Latin America
| Autor | Fernando Rios Avila |
| Cargo | Levy Economics Institute, United States |
| Páginas | 5-36 |
Ecos de Economía: A Latin American Journal of Applied Economics | Vol. 21 | No. 44 | 2017
Research Article
UNIONS AND ECONOMIC PERFORMANCE IN DEVELOPING
COUNTRIES: CASE STUDIES FROM LATIN AMERICA*
Los sindicatos y rendimiento económico en los países
en desarrollo: Estudios de Casos de América Latina
Fernando Rios-Avilaa
Abstract
This paper analyzes the economic impact of unions on productivity in the manu-
facturing sector across six Latin American countries: Argentina, Bolivia, Chile,
Mexico, Uruguay, and Panama. Using an augmented Cobb-Douglas production
function, the paper finds that unions have positive, but mostly small, eects on
productivity, with the exception of Argentina, with a large negative eect, and
Bolivia, with no eect. An analysis on profitability shows that, in most cases,
the positive productivity eects barely oset higher union compensation, and
that unions are negatively related to investment in capital and R & D. Dierent
explanations for these eects are discussed.
Resumen
Este artículo analiza el impacto económico de los sindicatos sobre la producti-
vidad en el sector manufacturero en seis países de América Latina: Argentina,
Bolivia, Chile, México, Uruguay y Panamá. Utilizando una función de producción
aumentada de Cobb-Douglas, el documento encuentra que los sindicatos tienen
efectos positivos, pero sobre todo pequeños, sobre la productividad, con la excep-
ción de Argentina, con un gran efecto negativo, y Bolivia, sin efecto. Un análisis
de la rentabilidad muestra que, en la mayoría de los casos, los efectos positivos
de la productividad apenas compensan una indemnización sindical más alta, y
que los sindicatos están relacionados negativamente con la inversión en capital
y en I + D. En el artículo se discuten diferentes explicaciones de estos efectos.
Key words: U oductivity;
Pro v
v
Palabras clave:
Produc latina;
Pollo
JEL Classifications:
Received:
Accepted:
Published:
a. Levy Economics Institute, United States.
e-mail: friosavi@levy.org
* This paper has benefited from comments
and suggestions by Barry T. Hirsch, Julie
L. Hotchkiss, Rachana Bhatt, and Myriam
Quispe-Agnoli.
ISSN 1657-4206 e-ISSN 2462-8107 Vol. 21 No. 44 PP. 4-36 DOI: 10.17230/ecos.2017.44.1
PP 6 | 104
Ecos de Economía: A Latin American Journal of Applied Economics | Vol. 21 | No. 44 | 2017
Unions and Economic Performance in Developing Countries: Case Studies from Latin America
Introduction
One of the most contentious debates in the literature on unions has been on how unions aect a
firm’s performance. While most of the literature agrees that unions have mostly negative eects on
profitability and investment, there is little consensus on the eects that unions have on productivity
(Kuhn ; Doucouliagos and Laroche , ; Aidt and Tzannatos ; Hirsch ). To some
extent, the uncertainty surrounding these issues reflects problems with data limitations, as well as
the underlying heterogeneity in union eects across establishments, industries, and countries.
Although there is a reasonably large literature for several developed economies, there is little evi-
dence regarding “what unions do” for establishment productivity in developing economies. Because
businesses in developing economies face dierent types of obstacles, such as restrictions on access
to capital, unfavorable institutions, high levels of corruption, less competitive markets, and unstable
business environments, compared to those in developed countries, it is not clear how unions aect
productivity.
The purpose of this paper is to expand the literature by analyzing the impact of unions on pro-
ductivity for six countries in Latin America, namely Argentina, Bolivia, Chile, Mexico, Panama, and
Uruguay. Dierences in their economic settings and adaptation to market reforms provide a mixture
of settings which suggests a cross-country study may prove valuable to better understand the rela-
tionship between unions and productivity.
Using data from the World Bank Enterprise Survey, modified Cobb-Douglas production functions
are estimated to determine the impact of unionization on establishment productivity, controlling for
various measures of establishment characteristics. Due to considerable levels of non-reporting in the
survey, a “principled” multiple imputation approach is used to improve the completeness and reliability
of the data. The preferred model indicates that unions have slightly positive but mostly insignificant
eects on productivity, with Chile and Panama showing the largest, but not significant, union-produc-
tivity eects. The exception is Argentina, where the estimates are negative and statistically significant
across all specifications. Alternative measures of unionization reveal that the union-productivity
relationship is not linear in all countries, which has contributed to the low significance of the results.
The analysis of profitability indicates that in most countries the small gains in productivity are
not large enough to oset the higher wage costs faced by unionized establishments. In Bolivia, the
profit and productivity evidence is not closely aligned, which seems to be driven by substantial di-
erences on capital intensity. Similarly, the evidence suggests that unions are negatively associated
with measures investment and innovation.
The rest of the paper is structured as follows. The first section presents a review of the empirical
literature, with emphasis on the research done for Latin America. The second section presents a brief
description of the history of unions in Latin America and describes the legal framework under which
unions operate in each country. The third and fourth sections describe the data and the empirical
strategy. The fifth and sixth sections present results on productivity and performance analysis.
Section seven concludes.
1 As Freeman () indicates, the research for developing economies is limited because data for this type of research is typically
inadequate, and also because unions in developing countries have been weak and unable to fulfill their role as bargaining agents in
their economies.
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Ecos de Economía: A Latin American Journal of Applied Economics | Vol. 21 | No. 44 | 2017
Unions and Economic Performance in Developing Countries: Case Studies from Latin America
. How do Unions Affect Productivity?
.. Theoretical background
There is a large theoretical literature that has explored the potential costs and benefits of unions in
terms of firm performance and productivity. Examples include Brown and Medo (), Addison
(), Addison and Barnett (), Freeman and Medo (), Hirsch and Addison (), Turnbull
() and, more recently, Hirsch () and Kaufman (). This literature has identified various
channels through which unions can have positive and negative eects on productivity.
According to the “two faces” approach, popularized in Freeman and Medo (), union’s eects
on productivity can be described using the monopoly face – from microeconomic theory – and the
collective voice/institutional response framework – from the industrial organization literature. The
traditional approach analyzes unions as monopolistic agents, stressing the negative aspects of unions
and the distortions they create compared to the perfect competition model. Within this framework,
unions extract monopoly gains from the employers by constraining the labor supply. This translates
into compensation above competitive levels for their members while potentially causing temporary
negative productivity shocks.
It is also possible that unions might impose the adoption of ineicient contractual work rules and
generate reductions in managerial discretion that may increase the cost of reacting to economic shocks
in dynamic economic environments (Hirsch, ). Furthermore, union rent-seeking behavior can
further reduce long run productivity by imposing a pseudo “union tax” on capital returns, limiting the
adoption of new technology and investment (Connolly, Hirsch, and Hirschey ; Hirsch , ).
Constraints in labor supply might also generate wage/price distortions that could force firms to
shift toward suboptimal mix of inputs, possibly causing (small) deadweight welfare loss and lower
overall labor productivity. These distortions might spuriously increase production per worker if firms
shift their input mix toward higher capital intensity and/or higher skilled workers, without genera-
ting gains of technical eiciency. This is less likely to be observed to the extent that unions tax the
quasi-rents from capital, reducing incentives to increase investment. Besides, although high union
wages opens the possibility to employ workers with higher skills, such outcome is unlikely, given
repeated bargaining (Wessels ; Hirsch ).
The “collective voice/institutional response” face of unions, as described in Freeman and Medo
(), puts more emphasis on the positive aspects of unions and their potential roles enhancing
operations and labor relationships within establishments. Legally protected unions can freely express
their members’ preferences in the workplace, improving communication between employers and
employees, inducing managers to alter methods of production and adopt more eicient personnel
policies. In turn they can also reduce potential transaction costs associated with turnover, training
and recruiting, monitoring and enforcement in the workplace (Kuhn ; Allen ). The presen-
ce of unionization and pressure for higher wages can increase productivity through shock eects,
2 Although there is anecdotal evidence regarding inefficient union work rules, it seems unlikely that such inefficiencies would be long
lived in markets with high levels of competition. There is no systematic evidence relating the interactions between union governance,
dynamism, and productivity.
3 For theory on unions and quasi-rents, see Grout () and Baldwin (). For the earliest empirical test, see Connolly, Hirsch and
Hirschey ().
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