Unions, Productivity and Profitability in African Manufacturing

1. Unions, Productivity and Profitability in African Manufacturing Garth Frazer University of Toronto IIRA 5th African Regional Congress, Cape Town, South Africa, March 2008

2. Goals of the Paper • To evaluate the relationship between unionization and firm productivity and profitability in Ghana • To measure the size of the union wage premium in the Ghanaian manufacturing sector

3. Overview of the talk • Related Work on Unionization and Productivity/Profitability in Industrialized Countries • Recent Related Work on Union Wage Premium in Africa • Industrial Relations in Ghana • Wage Equation Specification (to estimate the Union Wage Premium) • Production Function Specification (to estimate the impact of Unionization on Firm productivity) • Data • Results • Conclusions

4. 1. Related Work on Unionization and Productivity/Profitability in Industrialized Countries • Virtually all studies have found that unionization reduces firm profits, although in some cases unionization has had no effect • No evidence that unionization increases insolvency • Impact of unionization on productivity varies • Reasons for potential positive impact: • Lower turnover; higher morale; union wage attracting higher ability workers (only import-insensitive products) • Some studies have unionization lowers productivity (Bemmels, 1987; Benson, 1994; Brunello, 1992, Mitchell and Stone, 1992) • Others have found unionization associated with higher productivity (Allen, 1984; Mefford, 1986) • Others have found a zero, or non-robust impact (Conte and Svejnar, 1988; Machin, 1991)

5. 2. Recent Related Work on Union Wage Premium in Africa • South Africa • Butcher and Rouse, 2001 • - 20% for African workers, and 10% for white workers • b) Schultz and Mwabu, 1998 • - 19% for male African workers in top decile; 145% for those in bottom decile • Ghana (Blunch and Verner, 2004) • - also find larger effect for the bottom decile of the distribution

6. 3. Industrial Relations in Ghana • Core pieces of industrial relations regime in place for almost the entire period from 1958 to 2003 • New Labour Law introduced in 2003, but all of my data precedes the new Labour Law • Trades Union Congress (TUC) was the single umbrella union organization until 1992, and unions needed to apply for status through the TUC • Now Ghana Federation of Labour (GFL) is a second (smaller) umbrella organization • Check-off provision • Union density within the formal sector in Ghana is between 45% and 65% (public sector is highly unionized) • Union density between 5 and 8% for Ghana as a whole

7. 4. Wage Equation Specification • Typical specification for the wage equation log (wagei) = λ0 + λSSi + λXg(Xi) + λUUi + υi Where Si : years of schooling of worker i Xi : years of potential experience Ui : union coverage With λU the union wage premium

8. 5. Production Function Specification - Typical • Typical specification for the production function: yft = β0 + βllft + β kkft + ωft + ξft Where yft : log (value-added) for firm f in year t lft : labour kft : capital stock ωft : (unobserved) productivity of firm - Simplified representation for labour

9. 5. Production Function Specification – The Labour Term • Given the previous form the labour term, the firm’s wage bill is: • Σi (exp{ λ0 + λSSi + λXg(Xi) + λUUi + υi}) • In Frazer (2006), I prove that in the human capital model, with a competitive labour market, the labour term in the firm production function should look like the above, i.e.: • yft = β0 + βllog(Σi (exp{β 0 + β SSi + β Xg(Xi) + β UUi + υi})) + β kkft + ωft + ξft i.e. the factors that contribute to human capital (schooling and experience) should also contribute to firm output

10. 5. Production Function Specification – Estimation • A First-order Taylor expansion of the previous production function specification is: • To test whether unionized firms are more or less productive than non-unionized firms, test the significance of βH βU in the specification above • - If βH βU > 0, unionized firms are more productive • - If βH βU < 0, unionized firms are less productive • To additionally test whether unionized firms are more or less profitable, need to test for whether the productive impact of unionization (βU) is greater than or less than the union wage premium (λU)

11. 6. Data • Ghanaian Manufacturing Enterprise Survey (GMES) Data • Panel survey of roughly 200 manufacturing firms in Ghana in the 1990s • Organized by Oxford University, in conjunction with the University of Ghana (Legon), then the Ghana Statistical Service, originally under the auspices of the World Bank’s Regional Program on Enterprise Development (RPED) program • Survey of firms, as well as a sub-sample of workers (up to 10) at each firm

12. 7. Results (Production Function)

13. 7. Results (Wage Equation – Individual Level Regressions)

14. 7. Results (Wage Equation – Grouped Firm Level Regressions)

15. 8. Conclusions • Unionized firms are roughly 40% more productive than non-unionized firms • The union-wage premium is roughly 19% after controlling for firm size, ownership and firm productivity • However, cannot reject the hypothesis that the union-wage premium is essentially equal to the positive productive impact of unionization • Still, unionization appears to have at most no impact on firm profitability, and no evidence of a negative impact on firm profitability