LABOR-MARKETS, BARGAINING AND INNOVATION

Much of the recent empirical work on the impact of unions on R&D is ba sed on a theoretical model which predicts that (i) unions have a negat ive impact on R&D; (ii) under some circumstances an increase in union strength can make both firms and unions worse off. We survey a more re cent theoretical literature which takes account of the fact that R&D i s often undertaken for strategic reasons by firms that are in competit ion with one another. We show that in this framework the prevailing th eoretical paradigm may be overturned. Thus when firms and unions can e nter into long-term bargains then an increase in union strength will i ncrease (decrease) R&D spending if successful innovation causes employ ment to rise (respectively fall). However, when R&D falls then this in crease in union strength can cause both firms and unions to be better off. When firms and unions engage in short-term bargaining then an inc rease in union bargaining strength will cause R&D to fall when bargain ing is over wages alone. However, when bargaining takes place over wag es and employment, then, if unions care a lot about employment, the re lationship between union strength and R&D is inverse U-shaped. (C) 199 8 Elsevier Science B.V. All rights reserved.