Do labour unions help or hurt firms to invest in the long run? Evidence from Korea

ABSTRACT

This paper empirically addresses how labour unions affect firms’ long-term investment decisions and, thus, performances by utilizing unique firm-level data on labour unions available in Korea. We find that labour unionization makes firms invest more in human resource but less in physical capital. In addition, we show that as labour unions engage in rent-seeking behaviour, this causes firms’ investment decisions to be so distorted that the firms with labour unions get less productive, and consequently, the capital market valuates them less. Our empirical findings suggest that the problem of deciding proper investment could become more serious in the long run, if the labour unions participate in management and exercise their collective bargaining power to accomplish their interests as rent-seekers.

KEYWORDS:

• Labour union
• rent-seeking
• investment in human resource vs. physical capital
• total factor productivity
• firm valuation

JEL CLASSIFICATION:

• G32
• J30
• J51
• M41

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Grout (1984), Connolly, Hirsch, and Hirschey (1986), Hirsch (1992), Klasa, Maxwell, and Ortiz-Molina (2009) and Matsa (2010) view labour unions as rent-seekers which have incentives to take quasi-rent out as much as they can by exerting their collective bargaining power and threatening strikes.

² Each element of I_i is 1 if firm i belongs to a particular industry; 0 otherwise, and each element of T_t is 1 if year t is the same as a particular year; 0 otherwise.

³ The effects of labour unions are positive and significant on both of the staff costs-to-sales ratio and the logarithm of average wage. Hence, this finding implies that unionized firms invest more in human resources than those without unions. Further, we estimate the labour union effects on employment growth which is measured as the percentage change in the number of employees. Then we have the coefficient of the labour union variable as −0.0266 that is negative and statistically significant at a level less than one percent, which is according to the prior belief that union strength suppresses employment growth (e.g. Leonard 1992; Lalonde, Marschke, and Troske 1996). We could also reconcile the finding of more investment in human resources with the prior belief on negative employment growth in unionized firms as follows. If labour unions prevent firms from hiring employees outside the firms to keep higher shares such as wage of their employees inside the firms, they could affect employment growth negatively and human resource investment positively together.

⁴ Blanchflower, Oswald, and Sanfey (1996) show that labour unions are inclinable to require higher wage levels when their firms make good performance, but they agree on current wage levels when their firms bring bad performance.

⁵ Managers are also incentivized to keep a good relationship with unionized workers, since inefficient production or strikes may be caused by non-cooperative union workers as in Banning and Chiles (2007).

⁶ In this paper, we estimate a single equation of the labour union effects on investment in human resources and physical capital, respectively. So, the estimation results somewhat implicitly show the substitutive relation between human resource investment and physical capital investment. If we would explicitly show this substitutive relation between them, we can need another ways such as estimation of simultaneous equations. However, the ways of this kind are beyond the limits of our paper. So, we leave this issue for future work.

⁷ See The Korea Economic Daily, ‘Hyundai Heavy Industries’ labour union that calls for the right of recommendation on outside director,’ 12 February 2016, for details.