Unions and labour market institutions in Europe

We investigate the evolution of unionisation, considering both economic and institutional factors. While economists typically study the effects of labour market institutions treating unionisation as given and focusing on rent-seeking motivations, in this paper we study how union membership is itself related to the economic environment and, in particular, to labour market institutions. We argue that, if unions provide insurance against income and/or unemployment risks, government policies aimed at increasing worker security can alter workers' incentives to join unions. The empirical analysis focuses on the evolution of union density in 14 European countries over the post-War period. The traditional view of unions as coalitions of workers engaged in rent-seeking activities is analysed and contrasted with the complementary view that unions and labour market institutions provide (second best) protection against uninsurable labour market risks. Results suggest that rent sharing behaviour is weakly related to aggregate unionisation patterns, while economic shocks and labour market institutions appear to be more relevant in explaining cross-country differences in unionisation patterns. Institutions such as employment protection legislation, wage indexation, statutory minimum wages appear to crowd out unions, while institutional features that make it easier for unions to function (such as workplace representation and centralised wage bargaining) are empirically associated with higher unionisation. In the context of the ongoing debate on flexibility-oriented reforms and evolving European institutions - such as the European Monetary Union (EMU), the European Social Charter (ESC) and more generally the system of welfare provisions - the results in this paper offer implications both for the design of European institutions as well as for future of trade unions in Europe.