Ebook Union and Profitability of Korean Firms before the Crisis
There is little doubt that unions lower profitability of firms (Metcalf 2003; Aidt and Tzannatos 2002: 67-68, Freeman and Medoff 1984, Hirsh 1989). However, it is questionable whether unions lower profitability even when firms are close to insolvency.
Unions care about the job security of existing members as well as their wages, as long as they earn a premium over their next best alternative employment. When firms are close to insolvency and the job security of their existing members is threatened, unions may have the incentive to grant concessions, thereby helping raise profitability.
There is no lack of examples of union concessions when firms are close to insolvency (Freeman and Medoff 1984: 189; Kaufman and Martinez-Vazquez 1988). Of course, an opposite story is also possible. If unions feel that a firm is likely to fail, they may pursue an endgame bargaining to gain quasi-rents for workers while increasing the pressure on the firm to shut down (Lawrence and Lawrence 1985). Or, in case collective bargaining occurs at the industry level, unions might be willing to push unprofitable firms out of business to maintain a 'standard' of pay within an industry, as in countries like Sweden (Freeman and Kleiner 1999: 512). Whether unions really make concessions when firms are close to insolvency is thus an empirical question that should be resolved through an analysis taking differences in institutional setting into account.
The possibility that unions may raise profitability, however, may not necessarily be inconsistent with the fact that unions lower profitability. Unions may well lower profitability if firms are regarded as far away from insolvency. There could also be some intermediate range where unions may be neutral to profitability because firms are perceived as neither close nor far away from insolvency. The impact of unions on profitability may thus be favorable, neutral or unfavorable, depending on the distance of the firm from insolvency.
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