Labor Unionization and Supply-Chain Partners' Performance

We investigate whether labor unionization of customer firms affects the operating performance of their dependent suppliers. Using a sample of U.S. union elections, our regression discontinuity tests show that passing a union election leads to a 6.9 percentage-point decline in supplier operating margin in the following year. Such negative effects are more pronounced for customers with stronger bargaining power vis-a-vis dependent suppliers. Additional tests show that the reduced supplier operating margins are due to weakened top lines and, more specifically, to squeezed selling prices. Finally, consistent with increased labor costs, unionization is shown to significantly increase cost of goods sold and slow labor-force downsizing among customer firms. Overall, our evidence suggests that increased labor costs and financial inflexibility due to unionization induce customers to price-squeeze their dependent suppliers.