What Do Unions in China Do?

After three decades of fast growth, China has become one of the world’s largest economies, and its labor movement is arguably the world’s largest. But we are still lacking systematic evidence on the effect of Chinese unions on wages, employment, and other important economic variables, such as labor productivity and economic growth. With my friends and colleagues Wei Chi, Yijiang Wang, and Qianyun Xie, I have just published a study in the Journal of Labor Research that uses provincial-level data to analyze such effects.

In a Western context, it’s common to think of unions as having two faces, a monopoly face and a voice face. In the monopoly face, labor unions use their power, derived from the threat of imposing costs on the organization through strikes and other means, to increase wages and benefits above what the nonunion labor market would provide. So unions are associated with higher wages. Moreover, if this higher compensation provides additional motivation or attracts higher-quality workers, then unions would also be associated with productivity gains, albeit suboptimally (if a firm wants to raise wages to boost productivity, it doesn’t need a union to do so!). Alternatively, unions might reduce productivity if their monopoly power allows them to extract more favorable working conditions. As such, unions in the monopoly face benefit union workers, but generally at the expense of others.

In contrast, the collective voice face of unions occurs when unions convey information preferences to managers who are then better able to shape terms and conditions of employment that fit employee preferences. Productivity can improve via improved employee satisfaction and also via a direct channel of employee voice that identifies process improvements and resolves problems. Unlike in the monopoly face, these dynamics do not distort competitive labor market outcomes, and therefore the collective voice face can be socially beneficial.

Unions might act the same way in China. Or not. Unions in China are generally not independent of the business. Indeed, Chinese union leaders have traditionally been appointed by the Communist Party rather than elected by union members and Chinese unions are partly funded by the company and the government. By law, the Chinese labor movement has a single hierarchical structure; all unions are affiliated with the All-China Federation of Trade Unions (ACFTU) and there is no inter-union competition between unions. And Chinese Union Law does not allow workers to strike nor does it protect strikers from discrimination or retaliation by their employer. So Chinese unions might lack real power, and might serve more as an extension of political and business interests than as a advocate for workers’ interests.

In our analyses, we use provincial-level data spanning 15 years from 1994 through 2008 to estimate the relationship between union density and various economic outcomes. As an aside, provincial-level analyses are somewhat old-fashioned because of the greater level of aggregation compared to enterprise- or individual-level studies. So it is hard to disentangle the reasons that underlie various the statistical results. But we think this is a useful exercise because the existing micro-level studies are all drawn from limited samples (for example, a notable recent study  uses data from a limited number of medium to large cities, excludes small establishments, and might be biased because the focus of the survey was corporate social responsibility practices). Our provincial approach therefore captures a much broader spectrum of the geography and economy of China than the previous studies. The use of provincial data also allows for a fuller identification of the overall effects of unions if there are externalities, spillovers, or aggregate-level effects that might be under-estimated by firm-level or individual-level data.

So what do we find? We find that Chinese unions have a positive and significant relationship with provincial GDP and productivity in the secondary sector (mining, manufacturing, utilities, and construction), no significant effect on average wage levels, and uncertain effects on employment. These results are consistent with a weak monopoly face and strong collective voice face of Chinese labor unions. However, under the unique institutional conditions faced by Chinese labor unions, these results are also consistent with an alternative explanation in which Chinese labor unions act as agents of the enterprise and the state in delivering productivity enhancements at the expense of, rather than through the cooperation of, workers. So our findings cannot indicate who actually benefits from a positive productivity effect of Chinese labor unions. There is still much to be learned about the roles of Chinese labor unions in influencing individual and macroeconomic outcomes.

Source: John W. Budd, Wei Chi, Yijiang Wang, and Qianyun Xie (2014) "What Do Unions in China Do? Provincial-Level Evidence on Wages, Employment, Productivity, and Economic Output," Journal of Labor Research, vol. 35, no. 2 (June), pp. 185-204. Here is the complete paper.