Unions:rent creators or extractors?

This paper proposes a model of workplace-specific unions that integrates two views of what unions do. One view holds that unions mainly engage in rent extraction. Another view holds that unions mainly engage in rent creation by providing agency services that increase workplace productivity. We demonstrate that the choice between the two activities is systematically related to the economic and regulatory environment in which the union operates. Product market competition encourages rent creation, while labor market deregulation encourages rent extraction. Moreover, we provide a rationale for why firms may want to subsidize unions. © The editors of the Scandinavian Journal of Economics 2005.