Labour markets, bargaining and innovation

Much of the recent empirical work on the impact of unions on R&D is based on a theoretical model which predicts that (i) unions have a negative impact on R&D; (ii) under some circumstances an increase in union strength can make both firms and unions worse off. We survey a more recent theoretical literature which takes account of the fact that R&D is often undertaken for strategic reasons by firms that are in competition with one another. We show that in this framework the prevailing theoretical paradigm may be overturned. Thus when firms and unions can enter into long-term bargains then an increase in union strength will increase (decrease) R&D spending if successful innovation causes employment to rise (respectively fall). However, when R&D falls then this increase in union strength can cause both firms and unions to be better off. When firms and unions engage in short-term bargaining then an increase in union bargaining strength will cause R&D to fall when bargaining is over wages alone. However, when bargaining takes place over wages and employment, then, if unions care a lot about employment, the relationship between union strength and R&D is inverse U-shaped