Are Unions Team Players or Trouble-Makers? The Truth About Their Impact on the Economy

By Elsa Hermanns

Since the early days of industrialisation, trade unions have held a paradoxical spot in market economies. Indeed, unions are seen as champions of social progress, yet are often blamed for slowing down business profitability. Their impact on firm performance and economic growth continues to fuel heated debates in both political and academic circles. Nowhere is this more true than in Europe, where wildly different institutional systems lead to vastly different outcomes.

So, here is the real question: Are Trade Unions Killing Profits or Powering Productivity? This article will focus on France and Britain, and the provided results might shock you.

How Trade Unions Operate

France and the United Kingdom are ideal for studying the effects of trade unions on economic performance. They have both existed for a long time, but despite this, their trade union models are different. The UK has always had a voluntarist system. Under this model, union recognition is largely based on the will of employers and the explicit support of employees. However, as a result, it is true that they have a low unionisation rate. In the British private sector, it is around 15 per cent.  

By contrast, in France, although the unionisation rate is even lower, around 8 per cent, almost 95 per cent of employees are covered by collective agreements, thanks to a system of automatic extension of agreements. 

This contrasting model shapes trade union action. In France, trade unions can negotiate on behalf of all employees, including non-members. This strengthens their bargaining power but reduces the legitimacy derived from membership. In the United Kingdom, unions have to prove their representativeness through elections and do not have such an extension effect.

Collective Voice or Collective Drag? When Worker Power Meets Workplace Reality

One of the arguments in favour of unions is their role as a ‘collective voice’. This role enables them to reduce staff turnover, improve employee morale, and increase their commitment to the company. These improvements can thus increase productivity. Indeed, it has been proven that better communication between management and employees, facilitated in this case by the ‘collective voice’, can lead to better organisation of work and better consideration of staff needs. This hypothesis is supported by several empirical studies, particularly in the Nordic countries and in certain fields of the public sector where trade unions manage to work closely with management. 

However, this positive relationship is not self-evident. The effect of unions on productivity depends very much on the competitive context, the type of employment relationship and the management strategy. A British study highlights the fact that the positive effect of unions on productivity is only apparent in environments with little competition or a high degree of structure. On the contrary, in sectors exposed to strong international competition, the effect is often neutral or even negative.

Profit Wars: When Union Gains Hit the Bottom Line

However, one of the major shortcomings of unions is their impact on company profitability. In neoclassical theory, the ability of unions to obtain higher wages than the equilibrium level leads to a reduction in profits. Unless it is offset by an increase in productivity.

In France, trade unions' low density limits their ability to influence wages directly. However, the almost universal coverage of collective agreements does exert pressure on company margins. A study by Bryson et al (2011) confirms that, in establishments with high union density, financial performance is significantly weaker. He also highlights that this is particularly apparent when unions adopt militant or conflictual positions.

In the United Kingdom, the impact is more direct and negative. Particularly in workplaces where the union has active bargaining rights. The use of bargaining power often results in wage increases that are not offset by productivity gains, which in return reduces the net profitability of companies.

 Long-Term Gains or Long-Term Pains? Unions and the Innovation Equation

In addition to the immediate effects on wages and productivity, unions also influence long-term investment decisions. Companies anticipate that any rents from their investments could be captured by the unions in the form of increased wage demands. So, to protect themselves, companies may opt for strategic under-investment, particularly in specific assets and Research & Development-intensive sectors.

Therefore, in this context, trade unions can become an indirect brake on innovation. This dynamic is particularly noticeable in less cooperative environments. In these environments, unions give priority to defending the immediate interests of existing employees to the detriment of an integrated strategic vision. This helps to explain why, in some cases, employment growth is slower in highly unionised sectors.

Enemies to Allies? The Plot Twist in Labour Relations

Despite these tensions, trade unions are not necessarily at odds with economic performance. Several studies suggest that, in contexts where social dialogue is institutionalised and cooperative, trade unions can co-produce value for firms. Some studies argue that companies should agree to include their employees in their decision-making.

It therefore appears that the type of relationship between unions and employers - whether cooperative or conflictual - has a major impact. Therefore, the challenge for trade unions lies in their ability to move from confrontational trade unionism to proposal-based trade unionism, geared towards the co-construction of company policies.

Big Takeaway: Can We Make Capitalism Kind of ... Fair For Trade Unions?

Ultimately, trade unions embody a fundamental tension in capitalist societies: guaranteeing workers decent working conditions while preserving the competitiveness of companies. The effects of trade unions on productivity and profitability are ambivalent. They are marked by a strong dependence on the institutional context and the internal dynamics of companies. While the data tends to show an overall negative effect on profitability in both countries, they also point to avenues of transformation towards a more cooperative model.

Consequently, trade unionism in the 21st century will have to rise to a dual challenge. Which would be to maintain its legitimacy in a fragmented world of work and renew its modes of action to play an active part in the sustainable performance of companies.

Sources: HalTheses, Industrial Journal, The Economic Journal, The University of Chicago Press Journals, National Bureau of Economic Research, SageJournals.

Written by Elsa Hermanns

Edited by Nina Gush & Sarah Valkenburg