Monday, May 11, 2009

Unionization = 10% Decline in Firm Value


From the NBER Working Paper "Long-Run Impacts of Unions on Firms: New Evidence from Financial Markets, 1961-1999" by David Lee and Alexandre Mas (Princeton Univ.):

We estimate the effect of new unionization on firms' equity value over the 1961-1999 period using a newly assembled sample of National Labor Relations Board (NLRB) representation elections matched to stock market data. Our event-study analysis reveals substantial losses in market value following a union election victory – about a 10% decline, equivalent to about $40,500 per unionized worker. The evidence supporting this finding is compelling: we find that these firms’ average returns are quite close to the predicted returns every month leading up to the election, but at precisely at the time of the election, the actual and counterfactual returns diverge (see bottom chart above).

For example, in a March 1999 National Labor Relations Board (NLRB) representation election, workers at National Linen Service (NLS) Corp., a large linen supplier, voted by an over 2 to 1 margin to organize as a local chapter of the Union of Needletrades, Industrial, and Textile Employees (UNITE). The stock market response appeared to punish NLS in a severe, though perhaps not swift, fashion. Figure 1 (top chart above) shows the cumulative return of NLS’ stock for the two years prior to and following the election, as well as the cumulative return of a broad market index over the same period. Before the election, the returns for NLS and the market tracked each other quite closely. But immediately following the election, NLS began to lag. By March 2001, the price of NLS shares had fallen by 25%, while the broad market index had increased by 50%.

HT: Travis Walker (and Freakonomics)

MP: TANSTAAFL

10 Comments:

At 5/11/2009 8:51 AM, Blogger Chris Janc said...

Great post. Of course, this news will be taken differently by different constituencies. Investors, obviously, see it as validation of long held beliefs that unions are bad for owner returns. However, union organizers and labor activists will argue that this is simply the transfer of wealth from the investor class to the workers, a shift that SHOULD be made (for the record, I don't agree with this). What would be even MORE interesting would be to see a corresponding study of whether the 10% decline in market value actually directly results in a NPV of increased benefits and pay to the workers of 10%.

 
At 5/11/2009 9:01 AM, Anonymous LoneSnark said...

Quite true. I would suspect a lot of the decline in market value was just lost to other competitors or internal inefficiency.

 
At 5/11/2009 10:03 AM, Blogger BlogDog said...

Union trollery starting in 3, 2, ...

 
At 5/11/2009 10:37 AM, Blogger Robert Miller said...

Excellent analysis, but it's nothing that we couldn't learn from Econ 101. The people who don't need convincing already know this. The people who need convincing won't understand this and wouldn't accept it if they did. As one commenter said, the workers aren't apparently the stakeholders here.

Any idea what happened to employment relative to output after this? What happened to total US textile jobs after this? Lost jobs (or slower job growth) is something that voters, politicians, and workers might understand.

At your own university, when teaching assistants unionized, growth in TA employment ceased even though the undergrad population continued to grow. This means bigger class sizes and more rejection letters for aid or grad school. The union organizers at the U. of Illinois tried to spread the graph showing no decline in employment, as if that made their case. LOL!

 
At 5/11/2009 10:48 AM, Blogger 1 said...

Hmmm, I wonder how unionization will affect the following?

Economic Stimulus: Transportation infrastructure projects by county...

There are many billions of tax dollars involved in this game...

 
At 5/11/2009 10:55 AM, Blogger 1 said...

Hmmm, I'm thinking that there is a possibility that unions might start making a come back if the following is considered by an excessivly intrusive Congress: Diet, exercise and tax credits? Job wellness plans favored in CongressIn its effort to overhaul health care, Congress is planning to give employers new authority to reward employees for healthful behavior, including better diet, more exercise, weight loss and smoking cessation...

 
At 5/11/2009 12:50 PM, Blogger QT said...

Market capitalization is just one performance metric. To be completely fair to the union, shouldn't one also examine what happened to productivity, financial performance, or the company's marketshare in its industry.

1,

Unions evolved largely as a response to very poor working conditions. Working conditions have improved dramatically since the 19th and early 20th century and the majority of the workforce is engaged in service jobs where there really isn't any element of danger aside from the occasional irate customer. ie. a real estate agent or a lawyer vs. a welder.

There is also an extensive legal framework governing hours, holidays, workplace safety, etc. and providing legal recourse in cases of discrimination and illegal termination.

Increasingly, workers negotiate directly or retain the services of a consultant who specializes in compensation negotiations. The law does not permit employers to undercut wages of one group of immigrants after another like Chicago in the 19th century.

It is more likely that membership in unions will continue to decline unless unions change their approach ie. mentoring and career path development services. As Peter Drucker once observed, the customer determines the nature of the business.

Politicians cannot make time go backwards. The interesting thing will be to watch the development of the virtual office.

 
At 5/11/2009 1:06 PM, Blogger 1 said...

Hey QT:

"There is also an extensive legal framework governing hours, holidays, workplace safety, etc. and providing legal recourse in cases of discrimination and illegal termination"...

Hmmm, yes the socialist nanny state has inserted itself between the union membership and the employer...

I see this interference as another expensive but unfunded mandate foisted off on private enterprise and I've not seen it save any jobs in the transportation sector at least...

 
At 5/11/2009 1:35 PM, Anonymous gettingrational said...

I agree with QT on at lesst one point that unions will continue to decline unless they change on career path mobility. Businnesses realize they need better training and mentoring for their workers. The unions need to fully support and partner with employers in this regard or the jobs will continue to relocate. Competitivnes has many components but this part is in the union's court to embrace.

 
At 5/12/2009 10:14 AM, Anonymous Anonymous said...

Of course unions hurt companies - that is what they are paid by members to do!

 

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