# **f. Unions**<sup>**33**</sup>

Unions differ greatly in character throughout Latin America, but commonalities emerge in their impacts on: the profitability of the firms, investment and technology, wage and employment determination, and the size of the unregulated informal labor market in Latin America.

**_Unions decrease firm profitability:_** Several studies for Latin American countries are consistent with the OECD literature that in advanced countries union power tends to harm business profitability. Saavedra and Torero (2002) show decreasing profitability for firms in the presence of unions for Peru during the period 1994-1996  Similar evidence if found for Brazil by Menezes-Filho, Zylberstajn, Chahad and Pazello (2002) where they use the Annual Industry Survey pooled for the period 1988-1998. However, the results become inconclusive when observing the performance over time. Cassoni, Labadie and Fachola (2002) present preliminary evidence of a negative impact of unionization in profitability for Uruguay, though they acknowledge further work needs to be done. Urizar and Lee (2003) argue that in spite of low union density, productivity in coffee producers firms in Guatemala suffer greatly in the presence of Unions.

**_The impact on aggregate employment is unclear, but there is evidence of efficient bargaining._** The mainstream “efficient bargaining” models stress how in the presence of firm monopoly power, unions may choose to direct their negotiated share of rents toward either higher wages or employment. Hence, their impact on total employment may differ from standard “right to manage” models where unions raise wages and firms move along the demand curve to reduce employment. Maloney and Ribeiro (2001) find a strong impact on employment in Mexico, but little on wages, consistent with an extreme “efficient bargaining” model.  Both Saba Arbache (2002) and MenezesFilho et al (2002) find wage effects, and the latter work finds positive employment effects of unions as well.  Menezes also finds a concave relationships where some union concentration raises both wages and salaries, consistent with efficient bargaining, but after a point leads to deleterious employment effects.  In Uruguay, Cassoni, Labadie and Fachola (2002) also find that unionization promotes both higher wages and higher levels of employment.<sup>34</sup> Though suggesting that unions may increase employment in their host firm, the firm level analyses cannot capture  economy wide effects.  Some labor codes, for instance, dictate that negotiated contracts cover all firms regardless of size, and are widely seen as imposing inflexibility and hardship on smaller firms.

**_More importantly, unions may pose a barrier to technological adoption although the empirical work to date is only suggestive._** The theoretical literature does not unambiguous conclude how unions impact innovation. Hjalmaarson (1990) suggests that Swedish unions understand the link between technological upgrading and wages increases and aggressively encourage firms to adopt new techniques.  Parente and Prescott (2000) argue that more commonly unions focus on the short term goal of protecting jobs at a great cost in foregone productivity gains.  US studies find consistently negative impacts of unions on R&D but this is not so clear for European countries, which seem to bargain more on employment rather than wages. To date, there is little evidence for Latin America on which to report.  One of the few examples is Reis and Crespo (2004) who, using information for 1600 firms in Brazil, find evidence that labor legislations restrict firms to hire relatively more skilled workers which may, in fact, push toward more technological adoption. On the other hand, a case study of the aviation sector by Garcia Verdu (2004) suggests negative impact of

> 33 See Background paper by Bosch and Siga 2004

> 34 They argue, somewhat counter-intuitively,  however, that the channel through which these changes occur is substitution of labor by capital.

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