Unions, Quits and Innovation Theory and Evidence

In this paper we develop a Cournot duopoly model to assess how workplace unions affect process and product innovation. We consider an industrial relations system where firm- and industry-level organizations coexist. In the spirit of the literature on voice, we assume that local bodies decrease labor turnover, acknowledging that this may nullify the innovation-discouraging effect of central wage bargaining. Our predictions suggest that locally organized firms have greater product innovation incentives, while the effect on process innovation is less clear-cut. We then estimate an overidentified IV model on a large and representative sample of Italian firms and, consistently with the theory, find that firm-level bodies are responsible of 45 extra percentage points in the probability of undergoing product innovation, while the evidence on process innovation is more mixed. We also find that the presence of firm-level entities reduces workers’ turnover on both the hiring and separation margins – supporting our voice interpretation – and that alternative estimation strategies underestimate our findings