Want to limit role of unions …invite more FDI…

Andreas Haufler &  Ferdinand Mittermaier write this nice post.

They say it is ironical that more unionised countries get more FDI:

In the international competition for FDI, countries and regions with strong trade unions and relatively high wages are often surprisingly successful. Theoretical economic reasoning would typically suggest that unionisation, which tends to increase the level of wages, will act as a deterrent to FDI (Naylor and Santoni 2003; Munch 2003). Nevertheless, several empirical studies find instead a surprising positive effect of unionisation on direct investment (e.g. Friedman et al. 1992).

Why so? Well FDI helps policymakers negotiate with Unions for more jobs and lesser wage raise:

In recent research (Haufler and Mittermaier 2011) we show that high subsidy payments can be a rational policy for governments, as they give trade unions an incentive to exert wage restraint in exchange for additional jobs that are created in the newly-attracted firms. A government that acts in the best interest of its citizens will therefore be willing to offer multinational firms a subsidy that more than compensates the firm for the higher wage cost in that region. These subsidies not only induce the multinational firm to locate in the unionised country, but they also ensure that the union prefers a situation with lower wages and FDI to the alternative of setting a high wage but accepting low employment (which then occurs only in domestic firms). As a result, the unionised country or region is able to “win” the competition for FDI over its less-unionised neighbour. The subsidisation policy benefits the high-wage country in the aggregate, because union power is effectively curbed and wages are lower than they would be in the absence of the successful bid for FDI.

This does not mean unionisation is good for a country. Infact countries which want to limit the power of unions should invite more FDI:

The results of this research do not imply that unionisation is “good” for a country. In fact the high-wage country remains worse off than its lower-wage neighbour because of the high subsidies it has to pay to attract FDI. However, if the unionised country is not able to control wages directly (for example, because they are determined in a bargaining process between employers and employees, with no government involvement), then attracting multinational firms is an attractive solution for governments, in order to mitigate the effects of union power.

Superb. Some lessons for India possibly?

All such write-ups take you to micro classes in college as one really does not talk/read about unions/collective bargaining power much…

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