Unionization, Vertical Markets, and Outsourcing of Multinational Corporations

Abstract

This paper offers an explanation for multinationals that are both horizontally and vertically related. Specifically, when labor is unionized, the conventional incentives for merger may disappear in industries of successive (or bilateral) monopoly, due to a hidden effect of "double marginalization," which limits the amount of surplus that can be bargained between labor and the firms. We show that vertical integration raises both union employment and the negotiated wage but may reduce the total industry profits. As such, the integrated firm has incentives to outsource--going multinational, regardless whether the foreign country is unionized or not. We demonstrate that the negotiated wage decreases and firm profits increase with outsourcing. Thus unionization in vertically related markets makes firms become multinational conglomerates, i.e., going vertical, horizontal as well as multinational.

JEL Classification: F2, J5, L1