Induced inefficiency as a response to the union threat

Milkman and Mitchell (1995) extend Rosen’s (1969) threat-effect hypothesis to suggest that the threat of unionization can induce inefficient underutilization of labor by nonunion firms. If firms follow this strategy, the apparent paradox of competitive coexistence in the face of higher union wages reflects induced nonunion firm inefficiency rather than superior union firm efficiency. Furthermore, this strategy decreases demand for nonunion workers in a partially unionized industry. A generalized cost function analysis of data from sawmills in the Pacific Northwest yields evidence that nonunion firms use this strategy.