what happens when unions run firms? unions as employee...

JOURNAL OF COMPARATIVE ECONOMICS l&65-87 ( 199 1)

What Happens When Unions Run Firms? Unions as Employee Representatives and as Employers’

AVNER BEN-NER

Industrial Relations Center, University of Minnesota-Twin Cities, Minneapolis, Minnesota 55455

AND

SAUL ESTRIN

London School of Economics, Houghton Street, London WCZA 2AE, England

Received November 28, 1989; revised August 10, 1990

Ben-Ner, Avner, and Estrin, Saul-What Happens When Unions Run Firms? Unions as Employee Representatives and as Employers

The paper investigates two faces of unions: a bargainer with employers, and an employer in its own right. We develop parallel models of union-owned and private unionized firms and employ a sample of Israeli manufacturing firms to test various hypotheses. We conclude that: ( 1) union-owned firms do not behave very differently from their private sector counterparts; (2) higher wages in union-owned firms are associated with higher productivity rather than with systematic differences in weights attached to profits as against wages and employment in the two types of firms; (3) union ownership enhances enterprise productivity; and (4) wage and employment bargains do not lie on the demand curve; instead, efficient bargaining with a stronger emphasis on employment than on wages is found in both firm types. J. Comp. Econom., March 1991, 15(l), pp. 65-87. Industrial Relations Center, University of Minnesota-Twin Cities, Minneapolis, Minnesota 55455; and London School of Eco- nomics, Houghton Street, London WCZA 2AE, England. o 1991 Academic press, I N

Journal of Economic Literature Classification Numbers: 5 14, 830.

’ We acknowledge the helpful comments of numerous colleagues, especially Orley Ashen- felter, James N. Brown, Andrew Oswald, Theresa Van Hoomissen, and anonymous referees. Previous versions of this paper were entitled “What Happens When Unions Run Firms?” ( 1985) and “Unions as Employee Representatives and as Employers: The Impact on Wages, Employment and Productivity” ( 1988).

65 0147-5967191 $3.00 Copyright 0 1991 by Academic Press, Inc. All rights of reproduction in any form reserved.

66 BEN-NER AND ESTRIN

INTRODUCTION

It is a little known fact that many trade unions own businesses and therefore act as employers. In Scandinavia, West Germany, and Mexico, for example, unions own a fairly broad array of businesses, whereas elsewhere, such as in the United States, the extent of union ownership is limited to a few service activities. However, nowhere has union ownership reached the degree of importance and diversification as in Israel where the main union, the Hista- drut, represents most of the workforce and at the same time owns and oper- ates firms throughout the economy. In manufacturing, for example, the union holding company, Koor, employs about 10% of the total workforce.

The aim of this paper is to investigate and compare theoretically and empirically two faces of unions: the familiar face of a bargainer with employers, and the unexplored face of an employer in its own right. To accom- plish this, we describe the Histadrut and its Koor firms and develop a model of union-owned firms and a parallel model of private unionized firms. An examination of the relationship between the two faces of the union leads to hypotheses regarding its preferences over wages and employment in the two types of firms. In addition, an analysis of the effect of the internalization of the union’s role in union-owned firms and its adversary role in private unionized firms generates hypotheses about comparative productivity.

We employ a data set of Koor firms and private unionized firms where the Histadrut is the bargaining agent in a sample of 14 manufacturing industries over 10 years between 1969 and 198 1. We first estimate production functions for the two types of firms allowing for differences in technical efficiency, and use the resulting parameters to estimate the first-order conditions derived from the two models. Our main finding is that union-owned firms behave in a similar way to their private sector counterparts. Higher wages in Koor firms are associated with higher productivity rather than with systematic differences in weights attached to profits as against wages and employment in the two types of firms. We also find that union ownership enhances enterprise productivity, and that wage and employment bargains do not lie on the demand curve in either Koor or private firms. Instead, efficient bargaining with a stronger emphasis on employment than on wages or forward sloping contract curves, independent of the business cycle, is found in both.

The key institutional features of the union and union-owned firms in Israel are discussed in Section 2. Models of union-owned and private unionized firms are developed in Section 3, where functional specifications are also proposed. Section 4 presents the empirical findings. Findings are summarized and evaluated in Section 5.

WHEN UNIONS RUN FIRMS 67

2. INSTITUTIONAL BACKGROUND

The Israeli General Federation of Labor (Histadrut) is a multifaceted labor organization that represents most of the national workforce. Union offi- cials in various departments are controlled by the union’s executive branch, which is chosen by the Histadrut’s parliament. This parliament is elected in general elections along party lines in which the entire membership, including unemployed members and even those outside the labor force, is eligible to vote. This structure contributes toward a perceived role encompassing the interests of the entire population.

The Histadrut’s trade union department engages in collective bargaining with both private and public employers’ representatives. In the private manufacturing sector, which is virtually fully unionized, the Histadrut negotiates with the Manufacturers’ Association. National collective bargaining is sup- plemented by negotiations between branch, local, and firm-level representatives of both organizations (Glatt, 1973 ), so national contracts are amended to partly reflect specific conditions. On the whole, Israeli industrial relations present a case that is close to the corporatist model (Shalev, 1990, and Grin- berg, 199 1) and resemble the Scandinavian system of centralized collective bargaining (see Ben-Ner and Estrin, 1989a).

Since the 1940s the Histadrut has also developed its own enterprises, Koor firms.2 In manufacturing, some 150 enterprises employed about 10,000 workers in the early 1980s approximately 10% of the Israeli industrial workforce. Most enterprises were formed by the Histadrut de nova, with only about 10% purchased from private owners.3 Ownership rights are vested in the Histadrut and are therefore diffused throughout the union’s more than one million members. Since the workforce of each individual Koor firm represents a minuscule proportion of this total, there is no possibility of direct worker ownership or control at the enterprise level. Nonetheless, a measure of worker participation is implemented through enterprise-level work committees.

In fact, Koor firms are run in a fairly traditional way by union-nominated managers who are required to operate with broader union preferences in

* A few manufacturing firms are operated by other Histadrut concerns and are included in our data set and we shall, for convenience, refer to them as Koor firms. Koor firms, together with producer cooperatives and the manufacturing plants of agricultural collectives and cooperatives, form the industrial sector of the labor economy. They are formally affiliated with the Histadrut, which in I978 employed some 2 1% of industrial workers in Israel (Barkai, 198 1)

3 According to Koor’s top economists, from comments made in private conversations, the purchases have been typically guided by economic criteria. Formation of new firms and the expansion of existing ones by Koor were guided in part by the desire to provide employment (Kleiman, 1987).


TABLE I

MEANS OF KEY VARIABLES BY INDUSTRY OVER TIME: KOOR AND PRIVATE FIRMS COMBINED

Industry Capital-labor

ratio

Output per Output per unit of unit of capital labor Real wages

Mining and quarrying 0.203 0.615 0.114 0.060 Food/bev/tobacco 0.08 1 1.298 0.098 0.04 1 Textiles 0.132 0.814 0.096 0.047 Clothing 0.025 3.924 0.092 0.034 Wood and products 0.040 1.963 0.073 0.047 Paper and products 0.173 0.805 0.130 0.056 Rubber and plastics 0.063 2.088 0.117 0.048 Chemicals 0.175 0.970 0.157 0.063 Non-metallic minerals 0.105 1.202 0.127 0.057 Basic metals 0.112 1.039 0.115 0.065 Metal products 0.047 2.100 0.092 0.057 Electrical/electronics 0.030 3.890 0.109 0.058 Transport equipment 0.049 2.100 0.090 0.063 Miscellaneous 0.076 1.902 0.134 0.040

Note. Capital and value added are denominated in millions of 1967 Israeli lira. Employment is in thousands of worker-days. Real wages are expressed in thousands of 1967 lira per worker- day.

mind. Union preferences are developed through an interplay between the various departments of the Histadrut that have an interest in the way Koor firms are operated. These departments include primarily the department in charge of running Koor firms, the Koor directorate, and the trade union department. The Koor directorate has to answer its shareholders; that is, union members’ interests in profits. The trade union department seeks to advance Koor workers’ interests in wages and employment, and to use Koor firms to strengthen its position as bargainer in private firms. Thus, the trade union department may want to lend credence to its position in bargaining with private firms by implementing in Koor agreements terms that it hopes to achieve elsewhere. Finally, Histadrut leadership probably maintains some notion of equity regarding the treatment of union members who work in Koor and in private firms.

Our empirical work is based on data for private and Koor firms from a sample of 14 Israeli industries (two digit level SIC) in the manufacturing sector for 10 years over the period 1969- 198 1. Statistical sources and meth- ods of variable construction are discussed in the Appendix. Table 1 reports on some key features of the sample. The capital-labor ratio varies from around 200,000 1967 Israeli lira in mining to 25,000 in clothing. As expected, there is a tendency for more capital-intensive sectors to have rela-


TABLE 2

CAPITAL LABOR RATIOS, CAPITAL AND LABOR PRODUC~VITY, AND REAL WAGES IN Kook AS PERCENTAGES OF PRIVATE FIRMS

Industry Capital-labor

ratio

output per Output per unit of unit of capital labor Real wages

Mining and quarrying Food/bev/tobacco Textiles Clothing Wood and products Paper and products Rubber and plastics Chemicals Non-metallic minerals Basic metals Metal products Electical/electronics Transport equipment Miscellaneous

66.0* 143.9* 193.8* 175.6* 186.1* 209.1*

81.5 181.9* 149.0* 153.5* 149.5* 79.4 55.4*

297.6*

183.8* 67.1* 67.2* 99.1 66.6* 63.9*

184.3% 75.6;

145.2* 90.1 94.9

127.0* 197.2* 107.3

Il8.9* 95.0

116.1 183.1* 122.7* 135.9* 132.7* 131.0* 170.2* 139.7* 148.2* 95.2

101.8 2s2.1*

144.9* 110.3 126.8 142.9* 147.4* 130.6 120.9** 137.7* 144.7* 147.2* 151.1* 107. I 144.2* 128.6

All industries 137.0* 108.4 137.0* 135.0*

Note. The difference in Koor and private firms’ means is significant at 5% where * appears, and at 10% where ** appears.

tively greater labor productivity and relatively lower capital productivity; compare, for example, chemicals with clothing. On average over the whole period, Koor firms in our sample produced some 2 1 A% of total value added using some 16.6% of total employment and 24.2% of total capital.4 The remainder is accounted for by private firms; practically all these firms are unionized and bargain with the Histadrut.

Table 2 provides the average capital intensity, capital and labor productivities, and real wages by industry over the 10 years for Koor firms as a percentage of private firms. In each individual industry, Koor firms pay higher real wages, 35% higher on average. In terms of total factor productivity, Koor firms dominate outright with higher output per unit of both capital and labor in five industries. In eight of the remaining industries, Koor firms’ higher (lower) average capital-intensities provide higher (lower) average labor productivity but reduce (increase) the average product of capital. Fi-

4 Our sample excludes public enterprises and firms included in the labor economy but not run by the Histadrut. Hence the figure reported here is not directly comparable with that mentioned in footnote 2.


nally, in the food industry, Koor firms on average have lower capital and labor productivities despite their higher capital-labor ratios.

3. PRIVATE UNIONIZED AND UNION-RUN FIRMS: THEORY AND ESTIMATION

A considerable amount of recent theoretical and empirical attention has focused on the appropriate way to model union-firm interaction.5 The outcomes of negotiations between unions and firms in terms of wages, employment, and productivity are affected by the nature of this interaction, as well as by the union’s preferences and the relative bargaining power of the parties. We investigate each of these topics in a comparative framework that recog- nizes that the union negotiates with private employers on behalf of its members and is a significant employer in its own right. We commence with the familiar model of private unionized firms, which we extend to nest alternative representations of union-firm interaction and of union preferences. Next, we develop a parallel model of union-owned firms. Finally, we exam- ine the productivity effects of the union-firm interaction.

3.1. Private Unionized Firms

Interactions between shareholders and the union can occur in two princi- pal ways. If unions can enforce contracts with respect to wages but not employment, equilibrium outcomes lie on the firm’s demand curve. If instead the two parties bargain over both wages and employment, outcomes will occur along the contract curve of tangencies between the union’s indifference curves and the firm’s isoprofit curves. Such outcomes off the labor demand curve can be implemented through staffing arrangements, or through direct inclusion of employment level in contracts. Both are present in the Israeli industrial relations system.

There has been considerable debate in the literature as to whether monopoly union or efficient bargaining best represents union-firm interaction. The preponderance of evidence to date from the United States and the United Kingdom favors efficient bargaining.6 Our modeling follows the literature (see references in footnote 5) closely. We assume that private owners maxi- mize profits (a), with fallback profit ?rO, while the union maximizes the utility function u = U( w, L) with alternative utility level u, = V( w*), de-

’ See, for example, Hall and Lilien ( 1979), McDonald and Solow ( 1981), Oswald ( 1982, 1987), Pencavel ( l984), Brown and Ashenfelter ( 1986) MaCurdy and Pencavel( 1986), Svej- nar (1986), Card (1986), and Bean and Tumbull(l988).

6 See, for example, Bean and Tumbu11(1988), Oswald and Tumbull(1985), Carmth and Oswald ( 1985) MaCurdy and Pencavel( 1986), Oswald ( 1987), Eberts and Stone (1986), and Svejnar ( 1986).


pending on w*, the alternative wage. In the monopoly-union model, the union selects unilaterally a wage rate that reflects the tangency between its indifference curve and the firm’s labor demand schedule. Efficient bargaining can be represented by the familiar Nash solution concept.’

The common specifications of the union utility function are (a) the expected utility function [(LU( w) + (L* - L) U( w*)]/L*, with L* represent- ing the union membership, which implies that the union maximizes the expected utility of a typical member over the prospects of employment at the contract wage versus the chance of unemployment with the fallback income (Svejnar, 1986), and (b) the Stone-Geary function ((w - w*)‘L’), which implies that the union has preferences over the wage rate and employment of its members ( MaCurdy and Pencavel, 1986).

With the expected utility function specified as ( wa - w*“)L and assuming that the shareholders’ fallback is zero, the Nash joint objective of the firm and the union to be maximized is

G = a”[wa - Wan),],. (1)

With the Stone-Geary specification, the joint objective is

G = a”[w - w*)‘Le]“. (2)

Expressions (2) and (3) can be nested, taking the (rp)th root,

G’ = n6(wm - w*~)L~, (3)

where P = O/T and 6 = u/( 7~). Equation ( 3) reduces to the expected utility hypothesis if 0 = T ( P = 1)) and to the Stone-Geary specification if (Y = 1. The dual condition of 0 = r and a = 1 conforms with both models, and has the implication of a vertical contract curve. Hence tests on P and cr can discriminate between the expected utility and Stone-Geary formulations.

The first-order conditions for the maximum of G’ are w = w*awl-a + (~/e/L (4)

P.fL = w - (r/~hIL, (5)

where p is the product price, and fL the marginal product of labor.8 Combin- ing the two equations yields

’ See Binmore, Rubinstein, and Wolinsky ( 1985). The Nash solution concept has been used extensively in the trade union literature; see Aoki ( 1984), McDonald and Solow ( 198 1 ), and Svejnar (1986).

’ We assume that Israeli industrial markets are competitive, so that prices can be regarded as exogenous. This is not an unreasonable assumption for such a small open economy. Neverthe- less, if there are differing degrees of market imperfections, in our estimation they will be ab- sorbed into industry specific effects.


L

FIG. I. Contract curves.

pfL = w - (II/a)(w - w*%-@) (6)

and substituting the definition of r into (5) yields

w = w*~wl-~ + CY pf(L, K) - w*‘W-~L - rK

CY+a L (7)

Equation (6) represents the contract curve. Equation (7) determines the equilibrium wage-employment point on the contract curve. Each worker’s wage consists of w* plus 1 /L of the worker’s share in economic profits, which depends on both the relative bargaining powers and the union’s risk attitude.

Suppose that (Y = 1, the Stone-Geary condition; the following results can then be shown to hold. The contract curve is upward sloping (locus AC in Fig. 1) with 0 > 7 (i.e., r > 1) when the union emphasizes employment more than wages. If 0 = T ( r = 1 ), Eq. (6) reduces top fL = w* and we have the rent maximization case whereby employment is independent of the bargained wage and is determined relative to the workers’ alternative wage. The contract curve is vertical in this case (locus A’C). If 7 > /3 ( r < 1)) wages are


more important than employment and a backward sloping contract curve such as A”C obtains. When 8 = 0, the contract curve coincides with the labor demand curve and efficient bargaining with the union valuing only the wage rate cannot be distinguished from the monopoly-union case with the union valuing both wages and employment. Thus, monopoly-union cannot be rejected when 19 = 0; it is rejected in favor of efficient bargaining when 13 > 0 is estimated.

Suppose now that r = 1, the expected utility condition. It can then be seen from (6) that (Y = 1 implies a vertical contract curve (risk neutrality), whereas CY < 1 (> 1) implies a positively (negatively) sloped contract curve (risk aversion or risk loving, respectively).

3.2. Koor Firms

The discussion in Section 2 emphasized that union-owned firms have a financial obligation to the union membership at large, which calls for maximization of profits that accrue to the membership. This position is articu- lated by the Koor directorate, whereas the trade union department seeks to obtain wage and employment conditions that benefit Koor workers and advance the union’s stance vis-a-vis private firms. The trade union department and Koor directorate negotiate with the mediation of Histadrut leadership. The relationship between the parties can therefore be represented as a Nash bargain, as in the representation of the union-firm interaction.’ The utility increment of the Koor directorate is the amount of profit, as with shareholders in private unionized firms. The trade union department’s utility function presents a more complicated problem. While its preferences over wages and employment of Koor workers and of workers in private unionized firms are logically the same, a difference may be introduced via the desire to use wage and employment packages in Koor as a strategic tool in bargaining with private firms. The latter consideration may be implemented either via the weight on employment versus wages in the trade union department preferences, or through its relative power vis-&is the Koor directorate. However, there is no gain from distorting preferences over wages and employment in Koor. The only strategic gain can be derived from ob- taining a better package for Koor workers at the expense of profits, and using that as a demonstration effect in bargaining with private firms. Such a package can be attained if the trade union department enjoys more power versus the Koor directorate than it does in bargaining with private firms. This in turn depends on the weight the Histadrut leadership attaches to the trade-off

9 The interpretation of the Nash bargain here is probably closer to Nash’s ( 1950) arbitration idea than to the Rubinstein ( 1982) kind of bargaining.


between profits and the expected gain to the union membership due to the demonstration effect.

The leadership will not make an arbitration that places less weight on the trade union’s position than the weight that emerges from the bargaining between the union and private employers because this would imply that the union is a worse employer than private firms. Fairness considerations will limit the extent of bias in favor of Koor workers’ employment and compen- sation package as compared to those attained by members working in the private sector. If a productivity gain exists in Koor, a better package of employment and wages in Koor than in private firms can be obtained without biasing the distribution of Koor surplus.

Thus the Koor objective can be written G’ = T6’(Wa’ _ W*a’)Lr’

with first-order conditions (3’)

w = **a’ w’-a’ + (a’/G’)a/L (4’)

pfL = w - (r’/#)r/L. (5’)

The prime (‘) is placed on utility function and power parameters in the Koor problem, where I” = (Y/7’ and 6’ = a’/( 7’~‘). Contract and profit-share curves are also analogous to those of the private unionized firm in (6) and (7). The hypothesized relationship between the various parameters in the two types of firms can be summarized as follows. The preferences of the trade union are expected to be similar: r = I” in the Stone-Geary specification and (Y = (Y’ in the expected utility formulation. The distribution of the surplus to profits and workers in firms should reflect a weight on profits that is not greater in Koor as compared to private unionized firms: 6 2 6’.

3.3. Productivity Comparisons between Koor and Private Unionized Firms

Unions in private firms fulfill two major functions: bargain on behalf of workers for a share in the surplus, and express their collective voice (Free- man, 1980). Within individual union-owned firms, the second of these functions is fulfilled by enterprise-level work committees. The bargaining function, however, is supplanted by the interaction described earlier. Conse- quently, the adversarial relationship inherent in the circumstances of the private unionized firm is mitigated because the trade union department and the Koor directorate are part of the same organization. Because of this ar- rangement, the union leadership can act to reduce the negative effects of their conflicting objectives.

With regard to voice, the situation in union-owned firms is at least as good as that in private unionized firms. The partial internalization of conflicting objectives reduces incentives to promote the interests of one party at the

WHEN UNIONS RUN FIRMS 7s

expense of the other and to the detriment of the size of the surplus that can be generated. In the same vein, the two parties have fewer incentives to demand contractual assurances that guard their interests but which introduce inflexi- bilities in the organization of work, reduce investments in capital, and other- wise reduce the size of the feasible surplus. Consequently, labor relations in Koor firms are likely to be less adversarial, investments more profitable, and the organization of work more conducive to cooperative arrangements. Like- wise, longer retention and better training of workers is likely to result, lead- ing to the greater accumulation of firm-specific human capital.10 All these factors are endogenous to Koor firms and are expected to lead to greater productivity as compared to private firms. An argument to the contrary also exists, in that job security may reduce worker productivity, and the absence of private ownership could damage managerial and supervisory incentives, negatively influencing Koor firms’ productivity. On the whole, however, we hypothesize that productivity in Koor firms is greater than in their private counterparts. ’ ’

4. ECONOMETRIC RESULTS

This section focuses first on the estimation of productivity differences between Koor and private firms. Concerning wage and employment effects, our approach involves estimating the first-order conditions (4) and (5 ), and (4’) and ( 5’) directly.‘* We use the production function estimates to specify the relationship between the marginal product of labor and output, which appears in both first-order conditions via the profit function. Our approach, estimating a production function and the first-order conditions, follows Ma- Curdy and Pencavel’s ( 1986) limited information two step procedure.

The main part of the data set was derived from the Survey of Industry and Crafts, published by the Israeli Central Bureau of Statistics, which covers enterprises with five or more employed persons. The data cover the period 1969- 198 1. The first year was chosen because the Central Bureau of Statis- tics introduced new definitions and the previous series were not completely comparable. The last year was chosen because it represents the end of a period of moderate inflation. After this period, the financial accounts of firms were considerably perturbed by a runaway inflation, and were deemed unreliable for the purposes of this study. Three years ( 1973, 1974, and 1978 )

” Similar points are stressed by Barkai ( 198 1) who argues that the situation in Koor firms, particularly in the field of labor relations, is “something very close to co-partnership between the workers’ representatives and management.” See Williamson ( 1985) for a discussion of the effects of internalization in general and Ben-Ner ( 1988) for an application to labor relations.

” See Ben-Ner and Estrin ( 1989b) for a detailed analysis of comparative productivity. I2 Elsewhere (Ben-Ner and Estrin, 1989a), we estimate reduced-form equations approxi-

mated along lines proposed by Brown and Ashenfelter ( 1986).


were excluded because no surveys were performed. Further details can be found in the Appendix, where additional sources for auxiliary data are also described. The variables were constructed in conventional ways and are also described in the Appendix. Means of key variables are presented in Tables 1 and 2 and were discussed in Section 2.13

4. I. Production Functions and Productivity D@erences

In the empirical work which follows, we assume a common functional form for the two firm types but permit the relationship between inputs and output (value added) to vary via differences in predetermined levels of capital and via different forms of productivity enhancement, as well as allowing for variation in productivity and firm type. We start with a translog function, in which the intercept and In K, In L, (In L) (In K), (In L)2, (In K)2 are each permitted to vary by firm type, by industry and by time. We then determine the smallest set of theoretically and empirically sound restrictions that can be applied to this general form. The portmanteau of restrictions on the translog function suggests the following conclusions: I4

(i) The model best supported by the data is a translog form with disembodied time effects, embodied industry effects, and both embodied and disembodied firm-type effects.

(ii) The full Cobb-Douglas production function is rejected. (iii) Within the Cobb-Douglas specification, F-tests lead to a restricted

form exactly parallel to the accepted translog form.

I3 The data underlying this study will be made available to scholars wishing to replicate the results.

I4 The restrictions reflect time, industry, and firm type embodied and disembodied effects, and different functional forms: Cobb-Douglas and fixed proportions linear production function. The successive application of restrictions creates a tree; a model on a higher level branch is tested against lower branch models by testing the statistical significance of the restrictions that generate them. Accepted restrictions lead to the pursuit of restrictions on models at lower branches, whereas rejected models are abandoned. Most models are nested within each other, so that a standard F-test can be applied. If nonrejected models are not nested, the criterion for model choice is adjusted R*. The production functions were estimated using instrumental variable techniques. Instruments were the lagged values of the inputs, In L, In K, In L. In K, (In L)*, (In K)* for the translog forms, and their cross product term with industry and time specific dummies, as well as product price indexes, unemployment, lagged wages, and the cost of capital. The findings were not altered when the equations were estimated including lagged endogenous and exogenous variables. Because there were three gaps in the longitudinal dimen- sion of the data set, the loss of information involved in controlling for serial autocorrelation leads us to report results in which no controls were made. A detailed analysis of model choice and productivity issues, as well as production function estimates, can be found in Ben-Ner and Estrin (1989b).

WHEN UNIONS RUN FIRMS II

TABLE 3

AVERAGE Kook PRODUCTIVITY AUGMENTATION BY INDUSTRY: VARIOUS MODELS

Industry

Translog Cobb-Douglas

Restricted Full Restricted Full

Mining and quarrying -74.1 -35.1 2.2 -44.6 Food/bev/tobacco 138.1 294.0 -6.8 5.0 Textiles 135.4 293.9 -10.2 2.0 Clothing 29.1 -55.6 13.7 9.2 Wood and products 24.1 -19.6 15.5 -8.0 Paper and products 18.3 75.0 0.1 -20.4 Rubber and plastics 48.5 108.9 2.6 -11.4 Chemicals 45.1 120.6 -5.6 -14.0 Non-metallic minerals 39.7 107.2 -0.8 -14.7 Basic metals 14.9 63.9 5.5 -22.8 Metal products 16.9 126.9 4.6 2.8 Electrical/electronics 62.2 84.9 1.5 0.9 Transport equipment 29.5 66.5 7.6 -16.8 Miscellaneous 19.3 -2.2 17.2 -18.7

All industries 43.3 87.8 3.8 -10.8

Note. Productivity augmentation is evaluated at private firms’ input values and is based on 2SLS estimates.

For current purposes, we are interested not in determining the best fitting production function, but instead in the way that different specifications of technology impact on estimates of productivity differences and on estimates of first-order conditions. Therefore, we present results based on all four specifications: the functional form best supported by the data (the restricted translog), the full translog, the full Cobb-Douglas, and the restricted Cobb- Douglas form. Estimated total percentage productivity augmentation in Koor firms relative to private unionized firms is presented in Table 3 by industry and the overall average, calculated at the values of inputs observed in private unionized firm~.‘~

The restricted translog indicates that on average, Koor firms’ productivity is 43.3% higher than that of private firms, while the best Cobb-Douglas specification indicates a 3.8% productivity augmentation. Results from the poorly fitting full translog and the full Cobb-Douglas differ drastically: aug- mentations of 87.7 and - 10.8%, respectively. In the latter specifications, the estimates of parameters associated with the firm-type dummy were rather

” See Clark ( 1980) for a similar procedure.


imprecise. Our results suggest that union-owned firms are capable of produc- ing higher levels of output from the same amounts of inputs, a confirmation of the theoretical hypothesis. l6 This conclusion must be qualified, however. First, the divergence in results shows that the effect of union ownership on productivity is not very well determined in this data set. Second, it is possible that capital vintage effects, for which we could not control, favorably affect measured productivity in Koor. Third, it may be argued that the higher wages paid in Koor attract more productive workers, in addition to higher productivity permitting higher wages.”

4.2. SpeciJication of Alternative Wages The first-order conditions contain an alternative wage, w*, the empirical

specification of which may affect the estimates of interest. In order to ensure robustness of findings, we employ various definitions of w*. First, we assume that workers in higher wage industries fall back onto the wages of the textile industry, whereas workers in lower wage industries fall back onto agricultural wages (WY). Second, we assume that Koor workers, who enjoy higher wages, may count also on higher alternative wages, by relating Koor workers’ alternative wages to the long run differential between their wages and those of their counterparts in private firms within each industry ( w:). Third, we assume that all workers come from the same labor pool and face the same alternative wage; in the Israeli context we focus on the agricultural wage (w:). Finally, we use the average of the first and third alternative wages ( w:) .I8

I6 The higher productivity of union-owned firms does not imply that this form will be chosen throughout the economy. Owners of private firms cannot emulate the efficiency-enhancing strategies of union-owned firms without losing their claims to their firms. On the other hand, the union could buy existing private firms, eventually taking over large segments of the economy. However, the ultimate size of the union-owned sector in Israel, where it has been growing steadily since a decision to expand was made in the 196Os, appears to be constrained by political and ideological considerations. In the late 1980s the union-owned sector’s growth has been stymied by the difficulties encountered by the entire economy and the manufacturing industries in particular.

I7 In general, our finding that Koor firms are more productive than their private counterparts does not prove that union ownership causes higher productivity. As in similar econometric studies of productivity, our finding reflects an association, one that is most intriguing and runs counter to the normal way many economists think of the problem.

I* Thus, wr = wage in the textile industry; in the food, beverage, and tobacco, textile, clothing, wood, and miscellaneous industries, w: = w:. w: = 0.9 WT. WRAT for workers in Koor firms (WRAT = the ratio of wages in Koor and private firms reported in the last column of Table 2), and w: = w: for workers in private firms. w : = average agricultural wage, and w: = 0.5 w: + 0.5 w:.


4.3. Expected Utility and Stone-Geary SpeciJications Using the four production function estimates, first-order conditions (4)

and ( 5 ) for private unionized firms and (4’) and (5’) for Koor firms were estimated separately on data for private firms and Koor firms, respectively.” The estimating equations are, dropping the notational distinction between parameters of private and Koor firms,

*a lMa + Cy PitYit - r&t - WitLit wit = wit wit 6 ( Lit )

+ e;*

a PitYit _ ritKit - witLit Pit(Y = wit - S

( Lit 1 + t’i’,.

(8)

(9)

Value added y in both equations is linked to the marginal product of labor (y& in Eq. (9) via the derivative of the appropriate production function with respect to labor.

Initially, problems were encountered in implementing the general model empirically. When cy was unconstrained, the parameters 6 or I’ tended to zero. The system was therefore estimated under the constraint 6 > 0, l? > 0, which tended to bind in the iterative estimation process of nonlinear two- stage least squares from numerous starting points. The estimates of the coefficient (Y were almost always around one, and were never significantly different from one, for both private and Koor firms data and for alternative specifications of technology. For example, using only data on private unionized firms and estimates from the restricted translog function, starting values of a = 0.8,6 = 0.5, r = 0.8, generated estimates (standard errors) (Y = 1.10 (0.18) forw*= ~:,a= 1.117(0.3)forw~, and (Y = 1.248 (0.4) for wX . On this basis, we conclude that the data are consistent with a Stone-Geary specification of trade union preferences.

4.4. The Efects of Unions on Wages and Employment The first-order conditions derived from the Stone-Geary specification

(Eqs. (4) and (5 ) when (Y = 1) can be reformulated by writing out 6 explic- itly. Let p = p/u ( = 1 /T&). In the case of bargaining between the union and private firms, p represents the ratio of their respective powers. In Koor firms, 6 stands for the ratio of the weight of the trade union department’s objective relative to that of the Koor directorate. The parameters 7,0, and /3 cannot be separately identified in estimation of the first-order conditions unless some normalization is imposed. We adopt the normalization 0 + T = 1, which is

I9 These equations were also estimated for the entire data set in a manner similar to that described in the next subsection, but without any substantial difference in results.


consistent with union risk neutrality.*O Under these transformations, the first-order conditions for private firms are:

W= w*+pG L (10)

pfL= w-/3(1 -7);. (11)

Analogous equations apply to Koor firms. The differences between parameters (7, p) and (T’, ,8’) that correspond to the weights in the utility function of the trade union in the private unionized and Koor firms, respectively, are assumed to take the form 6’ = ,LI + z, F and T’ = T + z2F. z, and z, are shift parameters estimated on the dummy variable F which represents firm type; F equals 0 for private firms and 1 for Koor firms.

The union’s preferences for wages versus employment are likely to be stable over time, with one possible qualification. The rate of unemployment influences the probability of getting a job and therefore the union may em- phasize employment at the expense of wages when the unemployment rate is higher. We model this possibility by allowing the weight on wages in the union utility function to depend on the unemployment rate (UN), writing it as T + 7,UN (instead of just 7) in the private firm context and T’ = 7 + z,F + 7,UN in the Koor firm context. This formulation implies that the shift in union preferences away from wages during periods of high unemployment is the same within Koor and when bargaining with private firms. We hypothesize that 71 i O.*l On this basis we estimate on the entire data set the system

Wit = W:t + (p + z~F)(T + z~F + T~UN,)

*’ This assumption is at odds with Farber’s ( 1978) finding of risk aversion among U.S. United Mine Workers members. However, risk neutrality is more likely to hold for a broad-based national union like the Histadrut. In any event, in our framework we can estimate either the relative firm-union bargaining power or the union risk attitude, but not both. As noted earlier, the two are not really separable in the Nash formulation. Since our interest focuses on comparison of union preferences across firm types, and of preferences over wages versus employment, the risk attitude that we assume is not of consequence. However, the relative bargaining power must be interpreted cautiously because of its dependence on the risk attitude.

” Parameter r, may be smaller in the case of Koor firms under circumstances that require major reductions in employment, because the union may find it politically difficult to fire large numbers of workers (see Aoki, 1984, Chap. 6, for a related analysis). This possibility would require a more complicated specification of the dependence of r on economic conditions. During the period 1969- 198 1 the Israeli manufacturing sector did not encounter adverse conditions to warrant a more complicated estimating structure to account for such an asymmetric dependence.

WHEN UNIONS RUN FIRMS

TABLE 4

Two STEP ESTIMATES OF FIRST-ORDER CONDITIONS (EQs. ( 12), ( 13))

81

P 7 71 ZI Z2

0.670 (1.724) 0.718

(1.871) 0.596

(1.491) 0.666

(1.711)

1.383 (1.174)

1.411 (1.219)

1.221 (0.99 1)

1.164 (0.957)

1.034* (0.292) 0.964*

(0.281) 1.200*

(0.346) 1.210*

(0.322)

1.450* (0.293)

1.423* (0.273)

1.426* (0.352)

1.572* (0.328)

Restricted translog

0.096 -0.133 (0.132) (0.602) 0.101 -0.132

(1.138) (0.608) 0.073 -0.136

(1.154) (0.595) 0.096 -0.133

(1.131) (0.601)

Full translog function

0.193 -0.119 (0.274) (0.175) 0.187 -0.119

(0.283) (0.179) 0.259 -0.109

(0.214) (0.161) 0.229 -0.113

(0.240) (0.166)

Restricted Cobb-Douglas

0.354* -0.023 (0.055) (0.03 I)

0.374* -0.030 (0.053) (0.034) 0.442* -0.02 1

(0.042) (0.032) 0.410* -0.013

(0.043) (0.027)

Full Cobb-Douglas

0.309* -0.017 (0.057) (0.020) 0.327* -0.019

(0.042) (0.020) 0.372* -0.030

(0.047) (0.029) 0.354* -0.015

(0.042) (0.021)

0.133 (0.448) 0.115

(0.463) 0.115

(0.430) 0.112

(0.445)

0.126 (0.154) 0.120

(0.151) 0.144

(0.157) 0.146

(0.158)

0.314* (0.122) 0.228*

(0.111) 0.340*

(0.121) 0.357*

(0.122)

0.262* (0.098 1) 0.202*

(0.09 1) 0.287*

(0.099) 0.286*

(0.098)

-0.011 (4.985)

-0.029 (4.803)

-0.180 (6.360)

-0.035 (4.993)

0.073 (0.743) 0.035

(0.718) 0.119

(0.582) 0.099

(0.645)

0.001 (0.148)

-0.293 (0.155)

0.122 (0.140)

0.075 (0.130)

-0.092 (0.120)

-0.35 1 (0.124) 0.078

(0.143) 0.011

(0.116)

Note. The system was estimated using iterative two-stage least squares. Figures in parentheses are asymptotic standard errors.


pitfLit = wit - (6 + z,F)( 1 - 7 - z,F - 7,UN,)

x Pitfit(L~ K , , F) - r & t - W&it + E !

Li* ,I' (13)

The parameter estimates based on the four specifications of the production function and the four alternative wages are reported in Table 4. The estimation method is nonlinear iterative two-stage least squares. The estimates exhibit broad consistency across specifications of production technology and alternative wages. Thus /3, the ratio of union-firm power, is typically greater than 1, but smaller in the restricted translog; T, the weight on wages in the union utility function, is between 0.3 and 0.4 in the Cobb-Douglas estimates, 0.1 and 0.25 in the translog; T, , the parameter on unemployment, is negative, between -0.01 and -0.03 in Cobb-Douglas, slightly smaller than -0.1 for translog. The shift parameter on p, zr , is between 0.2 and 0.4 for Cobb-Douglas, and around 0.1 for translog. However, z2, the shift parameter of T, varies from small negative values (-0.35) to small positive ones (0.18).

The equations using the Cobb-Douglas production function estimates are fairly precisely estimated, with significant values for ,8, 7, and z, in all the estimates. The equations are less satisfactory with both full and restricted translog production functions, with none of the coefficients significant at the 95% level.22

The relative union-firm bargaining power estimates are given by ,8. The estimate of ,8 for the Cobb-Douglas runs varies between 0.96 and 1.57, and it is always statistically significant. However, in most cases the hypothesis that ,L? = 1 cannot be rejected, especially in the restricted Cobb-Douglas form. The restricted translog generated estimates of /3 that are smaller than one. Therefore, the estimation lends probable support for a value of /3 around one, which implies that the unions and firms are equally powerful in bargaining. This is consistent with the view that, if there is no asymmetry of information and no other factors affect the bargaining situation, the powers of the bargainers should be equa1.23

22 This is probably so because, though the translog form was preferred to Cobb-Douglas on the basis of F-tests, the majority of individual parameter estimates were less precise. This leads to greater imprecision in the predicted values of output and in the calculated marginal product of labor used in the second step equations. Thus, while the estimated parameters are similar to those for the Cobb-Douglas case, the standard errors are greater. The standard errors reported in Table 4 are not adjusted for the fact that the parameters were estimated by using, in part, predicted values from the first step regression. Thus, the true standard errors are somewhat larger. Nevertheless, no conclusions would be affected even if standard errors doubled (see Appendix in MaCurdy and Pencavel, 1986).

23 This result is contingent on the assumption that the trade union is risk neutral. If the union is actually risk averse, its estimated bargaining power would be greater than that reported in the


The discussion in Sections 2 and 3 suggested the hypothesis 8’ >, /3, with the corollary that Koor firms pay higher wages than their privately owned counterparts. This results because the union attaches less weight to profits than arises as an outcome of union-firm bargaining. The positive coefficient z1 , statistically significant with the Cobb-Douglas technology, provides some support for this hypothesis. As Eq. ( 12) indicates, the gap between the contract and the alternative wage depends on p, and hence the larger /3’ is relative to & the larger is the Koor workers’ gain in wages at the expense of profits. With p’ being about 10% above P, a portion of the 35% wage advan- tage in Koor can be explained this way.24

The shift parameter on the union’s preferences with regard to wages as against employment, z2, is small, alternating in sign, and not statistically significant in any of the 16 cases. The implication is that in Koor firms the weight attached to wages relative to employment by the trade union department is similar to the relative weights attached by the union in its bargaining with private firms. Furthermore, union preferences on this issue do not seem to be influenced by the trade cycle. While always negative, as hypothesized, the coefficient T, is never statistically significant.

The estimates of T, the weight on wages in the union utility function, are all less than 0.5 in the Cobb-Douglas formulations, and even less in the translog. If we take a typical value of T to be 0.37, then 0 = 0.63 and the implied contract curve is forward sloping. Wage-employment configura- tions are on the labor demand curve if 0 = 0 and r = 1. We reject this hypothesis for the Cobb-Douglas and the full translog estimates. For the Cobb-Douglas estimates, T is significantly less than 0.5 in all but one case, which suggests that the contract curve is not vertical. Including the effect of unemployment, which averages about 3%, via T, makes no difference at all to these findings, which carry over to the restricted translog. Our results are therefore consistent with efficient bargaining and a forward sloping contract curve in both Koor and private unionized firms.

In sum, in all specifications of technology and alternative wages, the weight on wages, including the effect of the business cycle, is somewhat smaller than the weight on employment, and significantly smaller than un- ity, both in the case of union preferences expressed in Koor firms and in private firms. Therefore, we reject with confidence the monopoly-union

text. This would be consistent with the common perception in Israel that the Histadrut is powerful relative to unions in many other countries.

r4 It will be remembered that, if the production function is Cobb-Douglas, productivity enhancement in Koor firms is calculated to be small or negative. The large wage differentials reported in Table 2 must be explained by differences in preferences. With the translog production function, productivity enhancement is calculated to be positive and large and we find no statistically significant differences in preferences.


model of union-firm interaction, and conclude that the contract curve is mildly forward sloping. This corroborates evidence based on estimation of Brown and Ashenfelter ( 1986 ) type reduced form approximations of the two step procedure presented in Ben-Ner and Estrin ( 1989a).

5. CONCLUSIONS

The paper has sought to cover a variety of themes: the differences between the preferences of the union in its dual role as bargainer with private firms on behalf of employees and as an employer in its own right, the nature of union- firm interaction, and the performance of union-owned firms as compared to their privately owned counterparts. Our framework involved the estimation of a structural model determining wages and employment jointly with a production function.

Our main finding is that the union’s preferences do not differ significantly when the union plays the roles of employer and bargainer. This leads to a similar behavior on the part of Koor and private unionized firms. However, higher productivity in Koor firms allows for higher wages to be paid to workers there relative to workers in private unionized firms.

Our findings reject the monopoly-union model in favor of efficient bargaining whereby negotiations take place over employment and wages simul- taneously. Thus wage and employment outcomes are not on the labor demand curve in Israeli firms. This is consistent with the findings of practically all studies on United States and United Kingdom data. In our study, the source of this result is likely to be found in the corporatist nature of industrial relations in Israel. Furthermore, the union exhibits a mildly stronger prefer- ence for employment than wages, so that the contract curve is slightly forward sloping. With a positively sloped contract curve, Israeli firms, both Koor and private, employ more workers than they would if the union was less powerful, or if it acted as a monopoly union.25 Being a large national union, the Histadrut internalizes some of the negative consequences of bargaining at the individual firm level, where highest wages may be pursued despite their disemployment effects.26

The themes pursued in this paper can also be explored in other institutional settings. A comparative study of union-firm interaction may highlight the wage and employment effects of the apparent international trend toward

25 Our findings are based on data from a period during which economic conditions improved or held steady ( 1969- 198 1). It would be interesting to study the behavior of the union in its two roles during the late 1980s when profitability in the economy declined. Initial evidence seems to suggest that private unionized firms opt more often for layoffs as compared to Koor firms which hold on to their employees and incur losses, even to the point where the only option is to shut down firms.

26 See Ben-Ner and Estrin (1989a) for further discussion.


decentralization of collective bargaining. The productivity, wage, and employment effects of union ownership of firms may be compared with those of employee participation in decision making and direct employee ownership of firms.*’ Such investigations should help to further elucidate the multifaceted effects of unions and their interactions with firms.

APPENDIX: DATA SOURCES AND DEFINITIONS

The data on Koor and private firms by industry were derived from the Suwey of1~&stry and Crafts, Central Bureau of Statistics, Israel, annual issues, 1969- 198 1. The period covered by the Survey is from 1969 to 198 1, but the years 1973, 1974, and 1978 were not used because no surveys were performed.

The Survey generally presents data by industrial branch at the 2-d& level SIC according to the sector of the economy in which enterprises with more than five employees operate-private, public (government), and Histadrut (the entire labor economy, see footnote 2)) and the type of incorporation- private company, public company, cooperative, and so forth. Data for the Koor sector were computed from data about the Histadrut as a whole and data about firms registered as cooperative enterprises. Three industries for which data exist were excluded from our empirical work because the information about two sectors was often combined and we deemed it impossible to derive reliable inferences. Other details about the Survey can be found in the Introduction to each annual report.

The capital stock, value added, and the wage bill are denominated in millions of 1967 Israeli lira, and employment in thousand worker-days. Value added represents output. Wages include fringe benefits at their full value. Consumer, capital, and industrial branch price indexes were derived from various issues of the Statistical Abstract of Israel. The user cost of capital comprises the depreciation rate for each industry plus the long term interest rate (4.5%), multiplied by the capital price index. Depreciation rates were derived from A. Ben-Bassat, Capital Stock and Investment Patterns in Industry, 1955-l 968, Research Department, Bank of Israel, 1972. The initial capital stocks were derived from Ben-Bassat’s data on capital stock by industry in 1968 and the sectoral distribution of capital presented in the Survey of Fixed Capital Stock in Industry, 1968 (Central Bureau of Statis- tics, Special Publication no. 4 13, 1973), and using inferences from investment behavior in each firm type over the period. The capital series was constructed in the usual way on the basis of the investment figures by firm type and by industry in the Survey of Industry and Crafts.

” Svejnar ( 1982) represents one rare attempt at such a comparison.


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