The Effect of Changes in Firm Diversification on Union Wage Settlements for 15 Major U. S. Industrial Firms

Abstract

A well known argument is that conglomerate firms may exploit their ability to cross-subsidize price wars for the purpose of engaging in predatory pricing.' A similar argument advanced by organized labor is that conglomerate firms can often outlast unions during strikes because they can cross-subsidize strike costs indefinitely [1; 15; 17]. This cross-subsidizing of strike costs, labor argues, greatly reduces the effectiveness of striking as a bargaining weapon, resulting in lower wage settlements for the union. Another fear articulated by organized labor is that conglomerates can simply eliminate divisions with troublesome unions. Since this threat is perceived by most unions as credible it may further increase the bargaining power of the firm [19]. While the opportunity to cross-subsidize strike costs or to eliminate troublesome divisions clearly exists for many conglomerates, there is no empirical evidence that they engage in these activities or that they enjoy lower wage settlements [12; 15].' This paper tests the proposition that diversification efforts by the firm can lead to lower wage settlements. Unlike earlier studies that examine the effect of a firm's conglomerate nature on wage levels, this paper examines how recent changes in the firm's level of diversification may affect wage settlements. The remainder of the paper is outlined as follows. In section I several key aspects of organized labor's argument are discussed and a formal testable hypothesis is proposed. Section II proposes a simple empirical test of the hypothesis. Section III discusses the data and the construction of key variables. Section IV reports and interprets the results of the regressions. Section V concludes the paper.