The Relationship between the Organizational Productivity and Unionism in the Organization - Literature review Example

Introduction The debate of whether the unions contribute towards the productivity of organizations. Main debate the positive contribution of unions towards the productivity came mainly from the pioneering work of Richard Freeman and James Medoff who pointed towards the possible positive impact of unions on productivity of organization.(Addison & Hirsch, 1989). It is therefore largely believed that the trade unions have the power to impact the various economic variables in the economy including productivity. It is also argued that unions by institutionalizing the governance structures within the organizations have allowed reduction in turnover and complementaries in production through the establishment of long term contractual relationships between the employers and the employees. The power of collective bargaining is another strong element which allows unions to have an impact on the various economic variables. However there is also a contrasting view of this hypothesis also which suggest that the presence of unions and productivity are negatively correlated. This essay will look into the relationship between the organizational productivity and unionism in the organization with special emphasis on exploring the hypothesis that both are negatively related. In doing so, we will be exploring a balanced view of the theoretical evidence present in favor of and against the potential relationship between the productivity and unions. Secondly, we will be analyzing the models prescribed by Freeman and Medoff in order to gain a further insight into this issue. Unionism and Economy The studies on exploring the impact of collective bargaining power of the unions within the organizations suggest that the unionized activities in the organization increase the productivity.(Wessels,1985). However before analyzing the issue of productivity and unionism, there is a need to understand the relationships between the unions and economy. Collective bargaining power of unions in the economy gives them strength and influences to change the wage levels in the economy besides those employees covered under the union memberships earn wages higher than those who are not covered by the Union memberships therefore unions basically compress the wage differentials. It is because of this characteristic of the Unions that it is largely argued that trade unions have a negative impact on the shareholders wealth and reduce profits of the organizations by demanding higher wage rates besides halting production activities due to strikes and other tools of aggression and protest. However, there is a very little evidence which can suggest that unions actually drive business firms out of the business therefore the role of unions in the economy is practically marginalized to two things. Their ability to impact wage rates in the economy give them a de-facto power to reduce the profits of the firms thus contributing negatively to the overall output and earning potential of the economy. Within that context, it can easily be argued that since unionism has negative impacts in reducing the wealth of shareholders thus leaving fewer profits to be re-invested to fund future growth of the firm. Within that sense it is quite clear that the unions have both negative as well as positive impacts on the economy. One of the major purposes which are often cited for the creation of unions within the organizations is the fact that creation of unions creates monopoly within the power structures of the organization which unnecessarily give institutional power to regulate the labor market thus modifying the basis of competition within the economy. The distribution of unions within the economy is largely concentrated in manufacturing sector specially mining, construction as well transportation with lesser concentration in the service sector. With the transition to the post modern era where we are now living into post industrial economy with substantial presence of service oriented firms, the impact of unions on the overall economy is lessening as the creation of clouts within the organizations are shifting more towards knowledge workers. Secondly with the advent of modern technology, the reliance on the human presence in the manufacturing processes specially has specially reduced the role of unions in the economy. Productivity and Unionism As discussed above that Freeman and Medoff through their work has advocated that the unions through their collective power of bargaining as well as institutional voice. This is based on the fact that the unions in effect create a conducive environment which is necessary for improving the morale of the employees as well as reducing labor turnover. Unions, also through raising their voice against the management practices effectively force them to remain within their stricter efficiency thus allow productivity to flourish in the organization. (Reynolds, 1986). There is also a growing debate in the academic circles whether the labor markets will be more competitive in presence of the unions or vice verse. Unionism tends to present a conflicting view of this question. This two pronged puzzle of freedom to compete and freedom to associate presents two theoretically conflicting issues since if organizations allow freedom to associate through unions, it has to curtail its freedom to compete and loose on the overall welfare of the consumers. (Hildebrand, 1959). Traditional theories about the unions suggest that that unions form cartels and create monopolies within the organization thus they do not contribute to the productivity of the organizations. However the shift in this perception changed with the introduction of book by Freeman and Medoff which actually created an alternative view, normally known as Harvard school’s effort to neutralize the traditional analysis of the cartels and monopolies of Unions. This thesis is based on the assumption that the collective power of the unions to raise collective voice in fact induces better management with better productivity within unionized enterprises by reducing labor turnover, enhancing worker morale and cooperation, negotiating "more efficient" workplace characteristics, resolving grievances, and pressuring management into stricter efficiency. It is therefore argued by Freeman and Medoff that the unions pressure management to be more efficient and in doing so management of the organization can respond to these pressures in more creative way thus improving the efficiency and productivity. Accordingly there are two faces of unionism which seems to be acting on the same time. First Unions have monopolies which may create environment which can even force business to go out of the business however it is the collective voice face of the unions which is basically contributing towards the productivity of the organizations. However collectively, the Freeman and Medoff thesis can be summarized on four premises: 1) A trade union is basically a vehicle to carry out the collective voice. In this way, trade unions are basically communication channels. 2) Unionism probably increase productivity 3) Unions promote economic equality 4) Unions are democratic and non corrupt organizations Thus the positive impacts of the collective voice of the union effectively nullify the negative impacts of the unions on the organization therefore they contribute to the productivity of the organization. Do Unions actually increase productivity? Studies conducted by Addison and Hirsch concluded that the unions sustbtaintially reduce profitability however, their impact on the productivity levels of the organizations is too small “and just as likely to be positive as negative” (Burnello, 1992). According to one study conducted in 83 West Virginia coals mines of 1920s it was found that unionism significantly reduced productivity at small mines but not at large mines (Boal, 1990). Thus evidence is there which amply suggest that unions do not contribute towards the productivity. Traditionally, unions tend to contribute towards increase in productivity through input prices and the most important variable which unions effect is the labor wage rate with relative to other input variables. Thus through so called allocation effect, unions changed the product per labor without increasing the overall demand by organization of the labor and other costs related with the production. Apart from that the traditional theoretical framework suggest that unions do so by practically substituting capital with more expensive labor.(Mefford,1986). However, unions on the other hand restrict the choice among the existing resources of the firms by distorting the proportion of various input variables thus through input restriction effect, unions tends to contribute negatively to the overall productivity of the organization. Managers often tend to discuss the negative contribution of unions towards the productivity by mentioning that the union restricts the rules of the work hence reducing the flexibility of the management of the firms. This can result in unproductive use of skilled labor in areas where such expertise is not required or restricting the movement of labor from one place to another or even restricting the technological advancement of the firms. Therefore in this way actually help unions to be a force which is seen largely as a negative influence on the overall employees besides hindering the productivity of the firms. Besides under collective bargaining agreements, managers need to obtain the approvals of the unions to change the various methods and procedures which can serve as an impediment for the firms and managers to unleash creativity and be more flexible in their approach to the manufacturing process especially. Apart from that unions may reduce productivity by not allowing or resisting the firing of poorly performing workers or inducing the promotions, based on the seniority of the workers who may not otherwise be capable of getting the promotions and heading more responsible job assignments in the firm. However probably the most important theoretical question which is the great impediment to the issue that labor unions contribute to the productivity is the measurement of productivity itself. Though there are various definitions of productivity however there is not a common ground yet which can safely suggest what actually productivity is and how it can be measured more accurately and correctly. Therefore this multiplicity of the factors which determine the productivity is considered as the biggest hindrance in making a conclusive remark on whether the trade unions effectively contribute in positive manner to the productivity of the firms. Unionism & labor productivity- cross country evidence In a study conducted in Japan on more than 900 unionized and non-unionized firms suggested that the unions in Japanese firms substantially reduced both productivity and profitability of the firms (Burnello, 1992). Similarly studies conducted in Britain pertaining to 1930s era suggested that due to bargaining powers of the unions that allowed those to exercise restrictive practices and collusive agreements resulted in sharp decline in the productivity of the British firms of the era. (Broadberry, 1992). There is also evidence from the OECD countries which suggest that the decline in the wage rate growth in OECD countries is mainly due to the declining power of unions through decentralizing the bargaining power of unions. This has effectively resulted in the reduction in the productivity of the firms. (Western, 1999). Conclusion Available evidence suggests that the unions have mixed impacts on the performance of the organizations. Empirical as well as theoretical evidence suggest that unions due to their collective bargaining power provide organizations the necessary spark to think in innovative ways to cater and neutralize the pressures exerted by the Unions. However on the other hand, this collective voice of the unions also restricts the working environment through collusive agreements with the management which in return effectively restrict management to make decisions which may prove more beneficial to the overall welfare of the organization as well as economy. References: 1) Addison. John T, Hirsch, Barry T. 1989. ’ Union Effects on Productivity, Profits, and Growth: Has the Long Run Arrived?, Journal of Labor Economics, pp.72-105 2) Wessels, Walter J,1985’The effects of Unions on Employment and Productivity: An unresolved contradiction, Journal of Labor Economics, pp.101-108 3) Reynolds, Morgan O, 1986,’ Trade Unions in the Production Process Reconsidered’ The Journal of Political Economy pp. 443-447 4) Boal. William A, 1990, ‘Unionism and Productivity in West Virginia Coal Mining,’ Industrial and Labor relations review, pp. 390-405. 5) Meffod, Robert M,1986,’ The Effect of Unions on Productivity in a Multinational Manufacturing Firm ’ Industrial and Labor Relations Review, pp.105-114 6) Hildebrand, George H, 1959, ‘ Economics by Negotiation’ The American Economic Review, pp-399-411 7) Brunello, Giorgio, 1992,’ The Effect of Unions on Firm Performance in Japanese Manufacturing firms’ Industrial and Labor Relations Review, pp-471-487. 8) Broadberry. S.N., 1992,’ Britains Productivity Gap in the 1930s: Some Neglected Factors,’ The Journal of economic history, PP-531-558. 9) Western, Bruce, 1999’ Explaining the OECD Wage Slowdown: Recession or Labour Decline?, European Sociological review, pp-233-249 Read More