UNIONS AND INNOVATION: A SURVEY OF THE THEORY AND EMPIRICAL EVIDENCE

 1.0 Relative factor price effects 

"There is a straightforward relative factor price effect of the union mark-up on any substitute factor of production. Consider a simple two-factor model where there is a choice between labour and new technological capital. An increase in the relative price of labour (through union wage increases) will cause substitution of high tech machines for workers, for a given level of output (i.e. along an isoquant). On the other hand, a union-driven increase in costs will mean higher average costs, causing lower overall production (a shift to a lower isoquant) and therefore less need for all factors, including labour. The impact of unions via their wage effects will depend on the balance between the substitution and the scale effects, so that even in a purely static neo-classical model, the direction of the union relative price effect is ambiguous." 

Reference: Naercio Menezes-Filho and John Van Reenen. (2003). Unions and Innovation: A Survey of the Theory and Empirical Evidence. Centre of Economic Policy. ResearchCEPR Discussion Paper No. 3792