Unionization and Profitability: Evidence of Spillover Effects

Abstract

Ruback and Zimmerman's (1984) event study, which showed that formal union-organizing activity significantly lowers a firm's market value, provides compelling evidence that unionization reduces a firm's profitability. Union-organizing activity may also have sizable cross-firm or spillover effects on the performance of neighboring firms. Thus the total impact of union organizing on the wealth of firm owners may be substantially understated by focusing only on the firm in which the union-organizing activity occurs. This paper presents an alternative approach for estimating union spillover effects on profitability using a data set and methodology similar to Ruback and Zimmerman's. We find that the total negative effects of unionization on profits, after cross-firm or spillover effects are included, are nearly three times as large as the own-firm effects reported by Ruback and Zimmerman. The hypothesis that changes in unionization have spillover effects on nonunion firms is well known. Formal union-organizing activity at one firm may increase the threat of unionization at other firms. Neighboring firms may respond to the greater threat of unionization