[the] 10 percent equity loss translates to a total loss of about $40,500 (in 1998 dollars) per voter, [which] represents a combination of a transfer to workers as well as lost profit due to inefficiencies caused by the union.
A successful effort to unionize a workplace apparently reduces the market value of affected publicly-traded firms, even if there is no immediate change in their operating performance. In Long-Run Impacts of Unions on Firms: New Evidence From Financial Markets, 1961-1999 (NBER Working Paper 14709), co-authors David Lee and Alexandre Mas estimate that the average effect of a union win at a workplace is to decrease the market value of the affected business by at least $40,500 (in $1998) per worker eligible to vote, based on monthly stock prices for 24 months before and after a vote to unionize. Their simulations suggest that a policy-induced doubling of unionization in the United States would "lead to a 4.3 percent decrease in the equity value of all firms at risk of unionization."
The decrease in equity value associated with unionization begins at the time the union wins its election and continues for about 15 months afterward. Calculations of the effects of a union victory suggest that it produces large negative returns of 10 to 14 percent. The authors also find that the effects are quite variable, depending on the degree of support for the union. When unions win elections with a bare majority, there is almost no union effect. But when unions win by a large margin, the effect can be as large as 25 to 40 percent.
The advantage of analyzing the stock market response to unionization is that if the stock market "correctly prices the firm, it should capture the sum of all costs imposed by the union, and effects that might occur many years in the future should be capitalized into the stock market valuation of the firm in the short run."
Lee and Mas also present evidence that suggests a possible mechanism behind the effect. Their analysis of Compustat data shows that, relative to cases in which unions lose organizing votes, organizing victories reduce growth in assets, because of decreased growth in plant, property, and equipment. Profit, and return on assets, appears unaffected by unionization.
Stable profits are consistent with less growth if firms grow by investing only in projects that "are sufficiently profitable." If unionization "reduces the number of these high net present value (NPV) projects, then it is possible for the company's growth rate to decline in spite of experiencing no change in its operating performance."
The authors note that the reduction in equity value represents "a combination of a transfer to workers as well as lost profit due to inefficiencies caused by the union." Their calculations suggest that if the true union wage effect were 8 percent, this would imply a 2 percent efficiency loss attributable to unions, as priced by the market.
The authors combine data from the National Labor Relations Board, the Center for Research on Security Prices, and Compustat to match union elections to stock prices and accounting data. Their main analysis limits the sample to firms where at least 5 percent of the workers voted on unionization of a particular workplace.
-- Linda Gorman