Unionisation Structures and Firms' Incentives for Productivity Enhancing Investments

This paper examines how unionisation structures that differ in the degree of wage centralisation affect firms' incentives to increase labour productivity. We distinguish three modes of unionisation with increasing degree of centralisation. (1) "Decentralisation" where wages are determined independently at the firm-level, (2) "coordination" where an industry union sets individual wages for all firms at the firm-level, and (3) "centralisation" where a uniform wage rate is set for the entire industry. We show that firms' investment incentives are largest under complete centralisation. However, investment incentives are non-monotone in the degree of centralisation so that "decentralization" carries higher investment incentives than "coordination." Depending on the innovation outcome, workers' wage bill is maximised under centralisation" if firms' productivity differences remain small. Otherwise, workers prefer an intermediate degree of centralisation, which holds innovative activity down at its lowest level. Labour market policy can spur innovation by either decentralising unionisation structures or by imposing non-discrimination rules on monopoly unions.