Do Unions Make Enterprises Insolvent?

This study investigates the impact of unionization and firm, business line, or establishment survival. A consistent empirical finding is that unions raise wages above those found in nonunion firms, and that in a competitive product market one would expect to find that unionized firms would go out of business more than nonunion firms. However, if unions engage in economic rent-sharing, then during periods of economic hardship unionized firms may be able to remain solvent by giving back some of these rents. In order to answer this question we analyze three data sets: a data set on the union status of solvent and insolvent enterprises and business lines from the Compustat files, a data set on the union status of workers who have lost their jobs due to permanent plant closures or business failures obtained by matching files from Current Population Survey, and a data set from the Federal Mediation and Conciliation Service on the outcomes of elections won by unions and on the outcomes of labor- management dispute cases. Overall, our results are consistent with the hypothesis that unions behave in an economically rational manner, pushing wages to the point where union firms may expand less rapidly than nonunion firms, but not to the point where the firm, plant, or business line closes down.