LABOR-MARKETS AND INNOVATION - EX-POST BARGAINING

There is considerable interest in how labour market conditions affect innovation. Lying behind much of the existing work on this question is a simple model of a single union bargaining with a single firm in which, in the absence of binding contracts, the union reduces the returns to innovation without bearing any of the costs. This misses an important feature of some R&D activity - its strategic competitive role in determining market share, a role which takes the form of a tournament. This feature is the focus of the model in this paper, where we explore the equilibrium outcomes in a model where firms compete in both the product market and R&D, and also have to strike a bargain with their workforce. R&D competition is modelled as a patent race. We study a situation of ex post bargaining where there are no binding contracts, so unions cannot directly negotiate over R&D, but bargain only over wages, and, in the case of efficient contracts, employment. Our two key results are that: with right-to-manage bargains, unions have less impact on innovation, the more they care about employment; with efficient contracts, there are cases where being faced with a stronger union will help a firm to win a patent race it would otherwise have lost.