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Edited by John T. Addison and Claus Schnabel
Chapter 9: Unions and Innovation: A Survey of the Theory and Empirical Evidence
Naercio Menezes-Filho and John Van Reenen 1. Introduction The role of trade unions in the economy has always been the subject of intensive debate. Traditionally, the theoretical literature emphasized the role of unions in distorting relative prices and the empirical studies concentrated on the determinants of union membership and on the eﬀect of unions on wages and proﬁtability. More recently however, economists have focused on the role of unions as ‘taxing’ the returns on sunk capital and on the design of eﬃcient contracts, whereas applied economists shifted their attention to the long-term eﬀects of unions, that is, on investment, technology and productivity growth. The reason for this shift of emphasis is clear. If the presence of strong unions led the ﬁrms to reduce capital and R&D (research and development) investments then unionized ﬁrms would tend to lose market share. In turn this would mean that the unionized sector would shrink and eventually trade unions would disappear from the economy.1 In a closed economy unions could organize an entire industry in order to avoid withering away, but this option is unavailable in an open economy, where a unionized industry will be undermined by competition from countries with weaker unions.2 Some commentators have contrasted the high R&D and dynamic innovation of the USA (where unions are weak) with the relatively lower R&D and slower innovation of Europe (where unions are strong) and drawn the conclusion that unionized labour markets may be at the heart of...
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