Donald R. Deere

The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth

This paper argues that firms use debt to protect the wealth of shareholders from the threat of unionization. Under U. S. labor law the firm cannot prohibit its workers from attempting to form a collective bargaining unit. Debt policy offers a method of reducing the impact of this monopoly right on shareholders. By issuing debt, the firm credibly reduces the funds that are available to a potential union. Empirical evidence that strongly supports this hypothesis is presented.

Unionization, Incomplete Contracting, and Capital Investment

This article examines empirically the hypothesis that incomplete contracts and resulting opportunistic behavior over the return to sunk assets reduces investment. Union-firm contracts are incomplete because they (1) do not prevent all actions aimed at changing the existing contract; (2) cover a relatively short time period; and (3) do not extend to union members yet to be hired. The primary response of firms is to reduce investment in specific durable assets and also to reduce employment growth and increase debt. The authors find fairly strong evidence of these effects in a sample of large publicly traded firms using firm-specific measures of unionization. Copyright 1993 by University of Chicago Press.

Unionization and Profitability: Evidence of Spillover Effects

Ruback and Zimmermans (1984) event study, which showed that formal union-organizing activity significantly lowers a firms market value, provides compelling evidence that unionization reduces a firms profitability. Union-organizing activity may also have sizable cross-firm or spillover effects on the performance of neighboring firms. Thus the total impact of union organizing on the wealth of firm owners may be substantially understated by focusing only on the firm in which the union-organizing activity occurs. This paper presents an alternative approach for estimating union spillover effects on profitability using a data set and methodology similar to Ruback and Zimmermans. We find that the total negative effects of unionization on profits, after cross-firm or spillover effects are included, are nearly three times as large as the own-firm effects reported by Ruback and Zimmerman. The hypothesis that changes in unionization have spillover effects on nonunion firms is well known. Formal union-organizing activity at one firm may increase the threat of unionization at other firms. Neighboring firms may respond to the greater threat of unionization

Labor Turnover, Job-Specific Skills, and Efficiency in a Search Model

This paper analyzes the implications for turnover of costly job-specific training. The presence of such costs in a search model implies that turnover decisions reduce the value of potential trades that are available to other market participants. There is too much turnover because of this external effect, and, therefore, too much retraining. When the investment in job training is endogenous, inefficient turnover again occurs, and the investment in specific skills is inefficiently high. The interactions between skill acquisition and turnover imply that it is essentially impossible for a brokerage institution to achieve efficiency.

Chapter 6 Educational Wage Premiums and the U.S. Income Distribution: A Survey

his chapter discusses the large literature and numerous issues regarding education-related differences in income in the U.S. Early analyses of skill-related differences compared the earnings of workers across occupations. The general consensus of these investigations was that skill premiums narrowed substantially between 1900 and 1950. The large increase in the supply of high-school graduates relative to the increased demand for skilled workers is the likely explanation. Following the 1940 Decennial Census, which collected information on educational attainment and on earned income and time worked, empirical analyses concentrated directly on education-related differences in earnings. The human capital revolution of the late 1950s/early 1960s greatly expanded the research on education and income and shifted the focus to wages. The human capital approach modeled income as endogenous and sought to understand the variation in earnings by providing a framework for estimating the returns to education and experience. Recent analyses of education and wages have built on this foundation and have been embedded in a large literature that seeks to document and understand the substantial increase in wage inequality over the last 40 years. The consensus is that increases in the demand for skill are the main culprit, though the reasons for such increases are still an open question. We use census data to document the overall increase in education-related income differences over the past 60 years for several income measures. We also document concomitant changes in enrollment and provide a preliminary analysis suggesting that enrollment has responded to the increase in education-wage premiums. We use NLSY data to document the variation in enrollment patterns for those who attend college and to show how these differences are related to pre-schooling characteristics and to post-schooling earnings. We conclude with a brief discussion of the main issues for future research raised throughout the chapter.

On the potential for private insurers to reduce the inefficiencies of moral hazard

The presence of moral hazard gives rise to inefficiencies in insurance markets. In two recent papers (Arnott and Stiglitz [I9861 and Greenwald and Stiglitz [1986]), these inefficiencies provide the impetus for an analysis of government intervention to improve welfare. The implications of this analysis are that government should tax those goods that increase expected insurance claims while goods that decrease expected claims should be subsidized. Such Pigovian-type taxes improve welfare when there is moral hazard because each consumer ignores the effect of his consumption of these goods on the average cost and, hence, the price of insurance for all consumers. The purpose of this paper is to examine the potential for insurance firms privately to provide these subsidies/taxes that mitigate the effects of moral hazard (Deere 1988, unpublished manuscript). Private insurers have a strong incentive to increase profits by subsidizing the purchase of goods that reduce expected claims. A biannual dental exam is an example of such a good that is routinely subsidized by insurance firms. There is a similar incentive regarding goods that increase expected claims. Though insurance firms cannot levy a private tax, they can effectively increase the price of such goods by making the premium depend on the purchase of these goods. Higher rates for smokers is a common example. Given such strong incentives, what limits the effectiveness of these private actions in reducing the inefficiencies of moral hazard? One obvious difference between private subsidies and premium surcharges is that a surcharge requires insurance firms to monitor consumption, which limits their usefulness. There are also, however, limits on the use of private subsidies. A subsidy to a policyholder will not reduce expected claims if the policyholder resells the good. If all firms but one give a subsidy, then the price in the resale market will be the subsidized price. The remaining firm could thus enjoy the benefits of a subsidized good-reduced claims-without bearing the cost of a subsidy. Hence, a successful subsidy scheme will involve goods that are not easily resold. Given the limitations imposed by resale, are private subsidies very common? The subsidized dental exams mentioned above are an almost perfect example of