Unions, Training and Rent
Unions mean more are trained, but fewer jobs

Trade unions help to ensure more workers receive training than if the choice were left to employers alone. Unionised workers also receive higher wages. And this helps explain some of the differences between the working of labour markets in Western Europe and the United States. The findings appear in a paper just published by the Centre for Economic Policy Research. The economists, Alison Booth and Marco Francesconi of the University of Essex and Gylfi Zoega of Birkbeck College London, conclude that unions often compensate for failure in the training market. The results are consistent with the evidence of the British Household Panel Surveys for the period 1991 to 1996 which show that unionised men receive significantly more training than their non-union counterparts.  The difference is equivalent to nine percentage points. They also receive higher wages and enjoy higher wage growth.

The reality underlying these findings is that unions and employees perceive a greater gain from training than do firms. Workers will be prepared to take up training opportunities even without pay. Employers fear they will lose workers in whom they have invested large sums for training (the so-called ‘quitting-externality’.) Unions can remedy this market failure in two ways. First they might, if they have a direct say in training in a whole industry, be less sensitive to the pressure of profits and therefore be prepared to force more spending and investment in maximising skills. If, on the other hand, unions cover just one firm, unions can push up wages in that firm thereby weakening the desire on the part of trained workers to quit that employer, even after having gained new skills.

The authors find that the wage levels of men covered by a union are on average 6% higher than the wages of their non-union counterparts, and that their wages rise by about 3% more a year. But a significant part of the union wage effect is due to the fact that unionised workers are more likely to receive training and this translates into higher wages. (The training received by non-union workers does not have a significant impact on wages.) This helps to explain why ‘workers always choose a higher level of training than do firms, independent of the level of wages…’. The quitting-externality lies behind this result: this phenomenon means that from the point of view of society, firms will always provide less training than the optimum.

Thus, unionised workers, compared to the non-unionised, are more likely to receive training and will receive more days training, as well as the higher wages and higher wage growth which encourage them to stay with their employer. At the same time this results in a lower overall employment level. The relationship between training, costs and trade unions thus helps explain why workers in Western Europe appear to receive more on-the-job training than do those in the United States.

Notes for Editors:

CEPR is a network of over 500 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. CEPR helps its Research Fellows to develop projects, obtain their funding, administer them and disseminate their results. The Centre’s research ranges from open economy macroeconomics to trade policy, from the economic transformation of Central and Eastern Europe to regionalism in the world economy. For further information about CEPR, please contact Rita Gilbert, Tel: (44 171) 878 2917 or email: rgilbert@cepr.org, or contact James Morgan, Tel: (44 181) 225 7262. Visit our website for a copy of this document or for additional services: http://www.cepr.org.

The Authors:

Alison Booth is Professor of Economics at the University of Essex and a Research Fellow in CEPR’s International Macroeconomics and Labour Economics research programmes. Marco Francesconi is based at the University of Essex and is a Research Affiliate in CEPR’s Labour Economics research programme. Gylfi Zoega is based at Birkbeck College London and is a Research Affiliate in CEPR’s Public Policy and Labour Economics research programmes.