Impact of Trade Unions on Productivity :

A Study of the Indian Chemical Industry

Ramjas

In this article, Ramjas analyses the extent

to which trade unions affect productivity
in the Indian context. Based on an
analysis of data (1960-1980) from the Indian chemical industry, the author finds
that trade unionism brings down productivity. He suggests that the potential of
trade unions to increase productivity has
not been fully exploited owing to factors
such as managerial response to
unionism, working conditions, wages of
workers, and the socio-political climate
in the country.
Ramjas is Lecturer in Commerce at the
Shaheed Bhagat Singh College, University
of Delhi.

Vol. 14, No. 2, April-June 1989

What is the impact of trade unions on labour productivity? Do periodic wage increases brought about
through collective bargaining result in higher
productivity? While some researchers emphasize
the potential unions have in offsetting wage increases through higher productivity, other researchers suggest that trade unionism brings down
productivity.
Many of the studies on the relationship between trade unionism and productivity have been
carried out in industrialized and developed economies and their relevance to developing economies
is open to question. This article examines the
relationship between trade unions and productivity
in a developing economy: India. The Indian chemical industry has been chosen for analysis for the
period 1960-1980.

Does Unionization Help Organizations?

Many studies lend support to the positive impact of
trade unions on productivity. Bok and Dunlop
(1970) contend that the net effect of collective bargaining is increase in productivity through a better
quality of the labour force. With increase in wages
through collective bargaining, labour employed becomes relatively costly. In response to a rise in the
relative wage, the firm seeks to raise the marginal
product of labour by raising the capital-labour
ratio. The effect is increase in the measured labour
productivity of the firm but increase in the unit cost
of the product and misallocation of resources.
Another method to offset the wage increase is the
recruitment of better quality of labour. Overtime, as
incumbents are replaced, the average quality of the
labour force will improve.
Yet another view which supports a positive
relationship between unionism and productivity is
put forward by Freeman (1976) and Freeman and
Medoff (1979,1984). This view is that the introduction of unions and collective bargaining brings about
fundamental changes in the organization, its product, and labour markets, Through increased productivity, unions have the potential to offset the cost
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increases that come through wage and non-wage inefficiencies (restrictive work rules) associated with
unionism. Unionism provides the workers with a
"voice" at the work place. The advantages claimed
for the "collective voice" mechanism are as follows:
unions can induce managers to alter
methods of production and adopt more ef
ficient policies
unions collect information about the
preferences of workers, thus permitting the
firm to choose a better (i.e. more efficient)
mix of wage and personnel policies
unions improve communication between
managements and workers leading to im
proved decision making
unions improve morale and cooperation
among workers.
Unionization also provides an alternative
mode of expressing discontent than quitting the organization with consequent reduction in turnover
costs and increase in firm-specific training.
Unionization 'shocks' management in reducing existing X-inefficiencies. Slichter, Healy, and Livernash (1960) observed that the challenges that
unions posed to managements have, if viewed
broadly, created superior and better balanced
management even though some exceptions may be
recognized. A union-shocked management is able to
extract more output from given amount of inputs
than a management which is not confronted with
union stimulus (Brown and Medoff, 1978).
Graddy and Hall (1985), Sloan and Killard
(1985), and Warren (1984), among others, put forward the view of a negative relationship between
trade unionism and productivity. Strictly speaking,
all these studies are not comparable because the data
sets, time periods, and estimation techniques are
different.

Framework
We have used gross value added (at 1960 prices) per
worker as a measure of productivity, gross fixed
capital at 1960 prices as a measure of capital, number of production workers as a measure of labour,
and average mandays lost per worker in industrial
disputes of last three years as a substitute for union
activity.
The basic source of data for value added,
depreciation, number of production workers, and
fixed capital is the Annual Survey of Industries
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(ASI). Since the ASI series published from 1973 onwards has used different classification codes for industries from those for the series 1959 to 1971, we
have used the adjusted data available in the Central
Statistical Organization (1984) to ensure comparability between different series.
Mandays lost in industrial disputes have been
taken from the publication of the Labour Bureau. We
have used gross rather than net figures of value
added and fixed capital. Depreciation is calculated
at rates allowed by income-tax authorities and does
not reflect real capital consumption. For this reason,
various Indian studies have used gross rather than
net figures (Sinha and Sawhney, 1970; Sastry, 1984).
Gross fixed capital at 1960 prices has been used
as a measure of capital. This series is not just the
deflated series of gross fixed figures at current
prices. Using the methodology of Hashim and Dadi
(1971), we have arrived at the figures of gross fixed
capital in 1960 at 1960 prices. To this, we added
back the deflated figures of additions to capital for
successive years till 1980. For deflating the series
of additions to capital figures, we have used an
index of machinery, equipment, and construction
with base as 1960. The series of fixed capital has
not been corrected for capacity utilization as reliable
estimates on capacity utilization for Indian
manufacturing are not available.
Owing to data inadequacies, we have not corrected the series of labour input for changes in age,
sex, educational attainments, acquisition of skills,
etc. The degree of trade unionism is measured by the
ratio of mandays lost in industrial disputes to
workers instead of the ratio of unionized workers to
total unionizable workers. However, the data pertaining to union membership suffer from several inadequacies:

It is not obligatory on the part of trade

unions to get themselves registered under
the Trade Union Act, 1926.
A sizable number of registered unions fail
to submit statutory annual returns. So the
data do not reflect the membership of all
registered unions but only a part of the
unions submitting returns. The range of
unions submitting returns varies from 18.9
per cent in 1980 to 67per cent in 1964 (In
dian Labour Year Book, 1984).
Union membership data not only exclude
the membership of unregistered unions
and unions registered but not submitting
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returns but also those data given by unions

but not sent by a few state governments to
the Labour Bureau. In 1980, for example,
13 states did not submit .data on union
membership. Table 1 provides a list of
states not submitting data.
On the other hand, data on mandays lost in industrial disputes are more reliable and, hence, we
used this to identify trade union activity.
Table 1: States not Submitting Data on Trade
Union Membership
Year
1972

1973
1974
1975
1976
1977
1978
1979
1980

States
Andhra Pradesh, Assam, Bihar, Maharashtra,
Uttar Pradesh, West Bengal, Kerala, Rajasthan,
Delhi, and Tamil Nadu
Andhra Pradesh, Assam, Bihar, Himachal
Pradesh, Uttar Pradesh, West Bengal, Kerala,
Rajasthan, and Delhi
Andhra Pradesh, Assam, Himachal Pradesh,
West Bengal, Uttar Pradesh, Kerala, and
Rajasthan
Andhra Pradesh, Assam, Himachal Pradesh,
Madhya Pradesh, Tripura, Uttar Pradesh, West
Bengal, Kerala, Rajasthan, and Delhi
Himachal Pradesh, Jammu and Kashmir,
Madhya Pradesh, Nagaland, Uttar Pradesh, West
Bengal, Kerala, Rajasthan, and Delhi
Assam, Bihar, Himachal Pradesh, Jammu and
Kashmir, Madhya Pradesh, West Bengal, Kerala,
and Rajasthan
Andhra Pradesh, Assam, Bihar, Jammu and
Kashmir, Tripura, West Bengal, Kerala, and
Rajasthan
Andhra Pradesh, Jammu and Kashmir,
Karnataka, Maharashtra, Nagaland, West Bengal,
Kerala, and Rajasthan
Andhra Pradesh, Assam, Bihar, Gujarat,
Himachal Pradesh, Jammu and Kashmir,
Karnataka, Madhya Pradesh, Maharashtra,
Nagaland, Tripura, Uttar Pradesh, and
West Bengal

Source: Indian Labour Year Book, various issues

Data Analysis
In the regression analysis, we relied on Brown and
Medoffs (1978) methodology. A modified CobbDouglas production function has been used.

Vol. 14, No. 2, April-June 1989

where Y is output, K is capital, L is labour (all on

per establishment basis). A is the technical
efficiency parameter, a is the elasticity of output
with respect to capital, LU is non-union labour, LN
is unionized labour, and c is the parameter that
reflects the productivity differential between
union and nonunion labour and gives the ratio of
the marginal product of union to non-union labour.
If c is greater than 1, union labour is more
productive; if c is less than 1, union labour is less
productive.
Equation (1) can be rewritten as:
a 1a
1a
Y = AK L
[1+(c 1)U]
(2)
where L = LU + LN and U=LU/L, i.e. the fraction of
the labour unionized. Dividing both sides by L and
taking natural log (Ln) we get:
Ln (Y/L) = Ln A+a Ln (K/L) + (1 a) Ln [1+(c -1)U]
(3)
or Ln (Y/L) = Ln A+a Ln (K/L) + (1 a) (c1) U (4)
This equation relies on the first order Taylor series
approximation that Ln (1+x) is approximately
equal to x. Equation (4) is based on the assumption
of constant returns to scale. If we relax constant
returns to scale, we have to replace (1a) by b so
that a+b is not equal to 1. In that case the equation
(4) will become
Ln (Y/L) = Ln A+a Ln (K/L) + (a+b1) Ln L + b
(c-l)U
(5)
Here, U stands for unionized labour. Since we will
be using mandays lost in industrial disputes per
worker as a measure for trade union activity, we
rewrite equations (4) and (5) as:
Ln (Y/L) = Ln A+a Ln (K/L) + (Ia) (cl) Urn (6)
and
Ln (Y/L) = Ln A+a Ln (K/L) + (a+b1) Ln L+b (c1)
Um
(7)
where Um is the ratio of mandays lost in industrial
disputes to worker. If the coefficient of unionization
is greater than zero, then c is greater than one and
unionized labour will be more productive. If it is less
then zero, then c is less than one and unionized
labour will be less productive.

Results
Table 2 presents the production function estimates. The variable log natural labour per factory
(LnL) has also been introduced so that the function
is not constrained to constant returns to scale. If the
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coefficient of LnL is significantly greater than zero,

it would suggest that the estimated function is subject to increasing returns to scale. If less than zero,
it would indicate decreasing returns to scale and if
not significantly different from zero, it would indicate constant returns to scale.
A trend variable (T) has also been introduced.
The correlation between Ln (K/L) and T turns out to
be 0.960 (see Table 3) which is very high and may
cause multicollinearity problems. So, the function
has been estimated with and without the trend variable. The results show that the coefficient of Ln
(K/L), as expected, is significant in all the estimates.
All the regression results are significant as shown by
F ratios. The coefficient of LnL and the trend variTable 3: Correlation Matrix
Ln(Y/L)
Ln (Y/L)
Ln (K/L)
LnL
T
Um

1.000
0.948
-0.708
0.923
0.780

Ln(K/L)

LnL

1.000
- 0.767 1.000
0.960 -0.886
0.881 -0.540

Urn

1.000
0.789 1.000

able is insignificant in all the equations.

In equation 3, when union variable (Um) is introduced along with Ln (K/L), R-2 rises from 0.900
in equation 1 to 0.909 which is significant at 10 per
cent. Relaxing the assumption of constant returns to
16.

scale (i.e. introducing LnL) the coefficient of

unionization becomes negatively significant at 5 per
cent and R~~2 rises to 0.914 as compared to 0.909 in
equation 1. The coefficient of LnL, however, remains
insignificant, signifying constant returns to scale.
The coefficients of unionization are statistically significant with negative signs signifying that
unionization decreases productivity in this industry. If the union coefficient reflects greater or
lesser efficiency of labour only, the union productivity effect can be calculated by dividing the union
coefficient by (1a) if the function is constrained to
constant returns to scale and by b if the function is
not constrained to constant returns to scale. The
results presented in Table 2 indicate union productivity effect to the magnitude of minus 19 and 17
per cent respectively. In other words, unionization
decreases productivity by approximately 17 to 19
per cent. The estimates do not support the "collective voice" hypothesis; in fact, they contradict it.
The estimates do not suffer from auto-correlation.
There is some problem of multicollinearity as the
zero order correlation coefficient between the variable Ln (K/L) and Ln L and Um are high. But this falls
within the Klein's rule as the multiple R is high relative to the zero order correlation between the variables (Klein, 1962).
In the previous analysis, the union variable has
been measured as a quantitative variable. In the
analysis to follow, the unionization data have been
collapsed from the ratio form to ordinal form and
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categories have been created. This seems to he

relevant as the exact numerical figures do not matter much (Koutsoyiannis, 1977). Four categories
have been formed and given values 04,2, and 3 (see
Table 4). The categories have been formed keeping
in view the distribution of the values of the variable.
The class intervals can be changed and will not affect the conclusions much unless they are enlarged
disproportionately.
Table 4: Categorization of the Union Variable

Table 5 presents the results of the estimates

when the union variable has been categorized. The
coefficients of Ln(K/L), like previous estimates, are
significant. The coefficient of unionization in equation 4 is significant at 10 per cent and just short of
significance at 5 per cent. R-2 increases in equation
4 to 0.911 from 0.905 in equation 3 with the introduction of the variable in LnL in equation 4. The estimates indicate that unionization decreases productivity to the extent of 29 per cent. Restrictive
work rules of the union are not accompanied by the
positive features of behavioural and organizational
Table 5: Regression Estimates when Union Variable is Introduced as a Category
(Dependent Variable Ln (Y/L)
(t values in parentheses)

Vol. 14, No. 2, April-June 1989

changes as theorized by the scholars. This suggests

that the "voice" mechanism does not operate and
that there is negative impact of unions on productivity.

Conclusions
Our results point out to a negative impact of trade
unions on productivity in the Indian chemical industry. The "collective voice" mechanism does not
operate in the industry either. It will not be irrelevant to point out here that the "voice" can
operate only in a "context" and that "context" is not
conspicuous on the Indian scene. The managerial
response to unionism, socio-political climate in the
country, working conditions in the industry, and
wages of the workers do not seem to create a
favourable atmosphere for the voice mechanism to
operate. The results are, therefore, not unexpected.
A word about the aggregation bias. We expect
that the estimates do not surfer much on this account
as employment in the factory sector of the country
is concentrated in medium and large sized establishments. Even then, we cannot rule it out completely. Our results are obtained with a highly specialized model, and it is probable that other models
with different data sets might produce results entirely different from ours.
References.
Bok, D C and Dunlop, J T (1970). Labour in the American
Community. New York: Simon and Schuster.
Brown, C and Medoff, J L (1978). "Trade Unions in the
Production Process." Journal of Political Economy,
86, pp 355-78.
Central Statistical Organization (1984). Principal Characteristics of Selected Industries in Organized Manufacturing Sector in India 1960-1980. Document No.
ISD/9,1984.
Freeman, R B (1976), "Individual Mobility and Union Voice
in the Labour Market," American Economic Review,
Papers and Proceedings, Vol 66, No 2, May, pp 36168.
Freeman, R B and Medoff, J L (1979). "The Two Faces of
Unionism," The Public Interest, No 57, pp 69-93.
________ (1984). What Do Unions Do? New York: Basic
Books.
Graddy, D B and Hall, G (1985). "Unionization and Productivity in Commercial Banking," Journal of Labour
Research, Vol 6, No 3, pp 249-62.
Hashim, S R and Dadi, M M (1973). Capital Output Relations in Indian Manufacturing. Baroda: M S University.

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