Common sense suggests that companies prefer not to recognize unions because they increase firms’ wage bills. Evidence indicates that unions do get a wage premium, but does not show a corresponding reduction of company profits. In Discussion Paper No. 1527, Jacques Bughin and Stefano Vannini provide an explanation for this paradox: so long as companies can pass on wage increases through prices, and justify price increases to customers by reference to increased production costs, profits will not be harmed.

Bughin and Vannini present a model of labour-management relations that formalizes such ‘cost-raising strategies’. Greater union power may sometimes increase the incentive for firms to distort prices (by invoking wage increases) and gain market power. The heightened incentive is contingent on items contained in the agenda of union-firm negotiations. If greater union power puts employment and wages on the bargaining agenda, higher profits may have to be shared with the union – and incentives to distort prices can be reduced. The model formalizes the way cost-raising strategies can be used by firms as rational behaviour. Should these strategies be put under scrutiny on anti-trust grounds, as the authors suggest, it would be necessary to show that firms’ actions are deliberate.

To be (Unionized) or Not to Be? A Case for Cost-raising Strategies
Jacques Bughin and Stefano Vannini