How Norwegian Businesses Respond to Increases in Unionization

What happens to company profits, wages, and consumer prices when union membership becomes more affordable for employees? That’s a question posed in an interesting working paper by Samuel Dodini, Anna Stansbury, and Alexander Willén. Dodini, who recently completed a postdoctoral fellowship at the Norwegian School of Economics, is now a senior research economist at the Federal Reserve Bank of Dallas. Anna Stansbury is the Class of 1948 Career Development Assistant Professor and an Assistant Professor of Work and Organization Studies at the MIT Sloan School of Management, where she in the core faculty of the MIT Institute for Work and Employment Research (IWER). Willén is a Professor of Economics at the Norwegian School of Economics. The authors’ working paper, “How Do Firms Respond to Unions?” was issued by the IZA Institute of Labor Economics. Stansbury also presented this research at the MIT IWER research seminar in spring 2024. 

In their working paper, Dodini, Stansbury, and Willén analyze the effects of a policy change in Norway that substantially increased the amount of union dues that were tax-deductible for individuals. This policy change had the effect of making union membership significantly less expensive for many workers. To conduct their analysis, Dodini, Stansbury, and Willén used detailed administrative data on workers and businesses in Norway, as well as customs records about exports by Norwegian companies. 

Because the policy change made union membership significantly less expensive for workers in those occupations with comparatively high union dues, the union density—that is, the percentage of workers in a union—at many companies became higher than it would otherwise have been, the researchers found. And, at companies with increased union density, labor costs also generally went up, as greater union bargaining power increased workers’ compensation packages. 

The researchers found that overall, the average business in the Norwegian economy reduced employment and output in response to greater union density, and profits declined slightly. This is in line with the “Economics 101” model of how firms respond to higher labor costs: as labor costs go up, firms operating in competitive labor and product markets tend to reduce employment. But Dodini, Stansbury, and Willén found a different—and surprising result—in the manufacturing sector. Norwegian manufacturing firms, on average, responded to greater union density by increasing employment and output; they passed their higher labor costs on to customers in the form of higher prices and profitability on average did not decline.

The authors conclude that this finding suggests that, on average, Norwegian manufacturing firms had a fair degree of market power within their local labor markets before the policy change, and that monopsony power had been keeping workers’ wages lower than the firms could profitably afford. “Employers with monopsony power can hire and retain workers for wages that are below the marginal revenue product of labor,” the authors explain in their working paper. “If a union can leverage its power to push wages above the current wage offered by the employer, the firm would hire more workers, but profits per labor unit would be lower because the wedge between the marginal worker’s wage and productivity would be smaller.”

Similarly, the fact that firms were able to pass on the labor cost increases in prices suggests that Norwegian manufacturing firms have substantial product market power. According to Stansbury, this is likely because Norwegian manufacturing is highly specialized, focused on products where consumers are not very price-sensitive—whether because they are complex and specialized, like parts for shipbuilding, or because they have substantial perceived brand quality, like Norwegian salmon.

“Our results are consistent with the average manufacturing firm [in Norway] possessing a substantial degree of power in both labor markets and in product markets,” the authors write. “For the broader [Norwegian] private sector in which firms do not hold much price- or wage-setting power, we observe the opposite result: employment and output contracts, and profits (weakly) fall.” 

Dodini, Stansbury, and Willén’s findings about manufacturing firms did not, however, apply to all manufacturing firms in Norway.  The smallest manufacturing firms reduced employment in response to increased union density—suggesting, in the authors’ analysis, that these smaller manufacturing firms do not have the wage- and price-setting power that larger firms do. 

A central implication of these findings, according to Stansbury, it that when we are trying to predict the effects of stronger unions on firms and the broader economy, it is crucial to understand the degree of market power firms possess in both product and labor markets. When firms have  monopsony power in labor markets, increased unionization can improve workers’ situation by raising wages and employment as well as improving overall economic efficiency (by counteracting the firm’s labor market power). When firms have market power in product markets, the costs of unionization may be passed on to consumers rather than borne by shareholders. In contrast, when markets are highly competitive (as in the “Economics 101” world), increased unionization may be more likely to entail tradeoffs between wages and employment, and between equity and aggregate efficiency. 

One interesting question is whether—and to what extent—these research findings are generalizable to other economies. For instance, many manufacturing firms in an advanced, high-wage economy like Norway focus on specialized products for which demand is not highly price-sensitive; for manufacturing firms which are selling products in more price-sensitive global export markets, it would likely be more difficult to pass the increase in labor costs on to prices.