Just as Ben Bernanke gives us some hope that the economic recession may be coming to an end, here's something new to worry about.
A working paper published by the National Bureau of Economic Research (the same organization charged with declaring the start and end of U.S. recessions) and summarized by Linda Gorman concludes that unions destroy shareholder wealth. In "Long-Run Impacts of Unions on Firms: New Evidence From Financial Markets, 1961-1999," authors David Lee and Alexandre Mas find that a union victory costs the owners of the company an average of $40,500 per worker.
Union advocates often argue that unionization does not result in a loss of profits. Indeed, the authors of this paper provide evidence that unionization has little impact on profits and return on assets. Unfortunately, they also find that growth at companies where unions win organization elections falls short of growth at companies where unions lose. In other words, unionization may not decrease profits, but it does put an end to the growth of profits.
Because the stock market is a discounting mechanism, investors anticipate this end to growth and sell the shares. The loss in equity value begins when the union wins an election to organize and continues for 15 months. The net result is large negative returns of 10-14%. It also turns out that the greater the margin of the union's victory, the greater the loss in shareholder wealth. This could also explain why unions are sometimes reluctant to take ownership stakes in organized companies.
With a new administration in Washington strongly backed by the unions, it's a good bet that organized labor will expand its reach in coming years. The authors of this paper estimate that a doubling of unionization will cause equity values to fall about 4.3%. This should give the administration something to ponder as it tries to save General Motors and Chrysler.