Competition, Work Rules and Productivity

More competitive markets are associated with higher productivity. However, changes in competition complicate productivity measurement since changing mark-ups may shift factor shares. This paper examines productivity measurement in markets with market power and restrictive work rules: rules that induce wages to be paid for non-productive labor hours. It develops a theoretical model to explain why workers would want restrictive work rules and how competition leads to their reduction. I model a monopoly firm whose workers dictate wages and work rules. Work rules allow workers to maintain both high levels of employment and wages. Competition reduce work rules and increase productivity by lowering mark-ups. The theoretical findings are consistent with the empirical literature on the impact of increasing competitive pressure on productivity.