Quality, trade unions and selection: the impact of unionization

Abstract This paper investigates how changes in the bargaining power of trade unions affect firm-level innovation through their impact on quality investment, within a model of heterogeneous firms. In a closed economy setting, we find that an increase in union bargaining power reduces average quality investment at the industry level. However, the effect is heterogeneous across firms: more productive firms decrease their investment in quality, while less productive firms increase it. These findings are confirmed in an open economy context, where we also find that stronger union power reduces the quality of exported goods but leads to an increase in the quality of imported goods.