Study: Strong unions help create economic stability
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Stronger unions have the unintended benefit of improving the overall stability of the economy, according to a new study co-authored by an Indiana University professor.
The study, “Resilience in Collective Bargaining,” examines how companies prepare for collective bargaining and how they respond to their workers becoming unionized.
Alessio Piccolo, assistant professor of finance at IU Bloomington, says such “union-induced” financial stability can help reduce the risk of unemployment for both union and non-union workers.
Piccolo said the study found companies make safer borrowing choices when their workforce becomes more organized or in response to labor negotiation events.
“In particular, in these cases, firms substitute riskier short-term debt with safer long-term debt,” he said. “And the reason is that they want to stay financially flexible if there is the possibility of having to ride out a strike, because that helps them with the negotiation as it improves their bargaining position.”
Piccolo said those safer choices not only helps companies endure strikes but also other types of adverse economic effects such as recessions, which affect all workers.
On the flip side, the study shows that the introductions of so-called right-to-work laws led to “significant increases” in riskier borrowing by companies, Piccolo said. Because companies have a reduced need to stay financially flexible, such choices might have a greater impact on unemployment risk.
“Using the 2007 to 2009 financial crisis as an example of a negative shock to firms’ cash flow, we showed that this favoring of riskier debt could have contributed to the equivalent of one additional million of unemployed workers by the end of the financial crisis in 2009,” said Piccolo.
Having stronger unions in place, the study found, could help reduce the chance of businesses going bankrupt or having to undergo layoffs because of the safer borrowing choices they made.
Piccolo said the authors of the study believe that carefully considering the relationship between unions and financial stability should be an important element in the discussions regarding right-to-work laws and, more broadly, U.S. labor polciy.
“We think that sound policy in this regard may as well provide an avenue to improve both the outcomes of workers and the broader stability of the economy”
Piccolo co-authored the study alongside Carlos Avenancio-Leon at the University of California San Diego and Roberto Pinto at Lancaster University in the United Kingdom.