Performance and growth in entrepreneurial firms: Revisiting the union-performance relationship

Abstract

Excerpt] A substantial body of research has examined the relationship between unions and firm performance. It generally has found a positive relationship between unions and productivity and a negative relationship between unions and financial performance (Freeman & Medoff, 1984; Addison & Hirsch, 1989; Belman, 1992; Freeman, 1992). The exit/voice model is most commonly used to explain this paradox (Freeman & Medoff, 1984). Freeman and Medoff argued that the “monopoly power” of unions leads to high union wages and restrictive work rules, both of which raise the costs of production and lower profit margins. The presence of unions, however, also lowers production costs by reducing turnover (exit) and providing incentives for employee effort through “collective voice.” Thus, unionized workplaces may be at once more productive but less profitable because employees share in productivity gains through higher wages. There are a number of reasons, however, why the findings from prior research may not generalize to firms in the 1990s, particularly, high tech and entrepreneurial firms. First, under the exit/voice model, the relationship between unions and firm performance is an empirical question that depends on the net effect of opposing forces. Most of the empirical evidence on this topic, however, draws on data from U.S. manufacturing firms in the post-World War II period, when mass production models dominated the approach to organizing work, union power was at its height, and union-management relations were largely adversarial. In the 1990s, however, several forces have changed. First, U.S. firms, particularly high tech and entrepreneurial firms, have adopted much more flexible approaches to organizing work, such as “high performance work systems” (Appelbaum & Batt, 1994), which reduce status differences between workers and managers. Second, union power has dropped significantly, with union membership falling from 24% of the private sector workforce in 1973 to about 10% in 1995 (Bureau of Labor Statistics). Third, mutual gains and win-win approaches to bargaining (Walton & McKersie, 1965) have transformed union-management relationships in many instances, leading to greater cooperation and less zero-sum conflict. For these reasons, we decided to revisit the question of the relationship between unions and firm performance by drawing on a unique set of 464 entrepreneurial firms at the time of their initial public offering (IPO) in 1993 and their subsequent financial performance through 1996. This is an important context to examine because entrepreneurial firms are a major source of economic growth in the U.S. They are known for their innovation and flexibility in responding to rapidly changing market demand. Unions are conventionally viewed as barriers to change and anathema to the type of flexibility and quick response needed to compete in entrepreneurial markets. Thus, it is important to know whether unions pose a negative threat to financial performance and economic growth in this important sector of the economy. This is also an appropriate context for exploring the topic of unions and financial performance because most entrepreneurial firms are small and young. They are less likely to have the kind of “monopoly union power,” conflictual labor management relations, or rigid work rules traditionally found in large U.S. mass production enterprises the context of much prior research on unions and financial performance. In this context, firms and unions have more opportunity to adopt new forms of work organization and labor-management relations. In this chapter, we first review the prior literature on this topic, including theoretical frameworks and the empirical evidence on the union-performance relationship. Then, we present our quantitative case study of This article is available at DigitalCommons@ILR: http://digitalcommons.ilr.cornell.edu/articles/940 unions and financial performance in entrepreneurial firms. In the final section, we consider our findings in the context of the prior literature and suggest avenues for future research.