Review of Industrial Organization 17: 385–394, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
The Impact of Product Market Competition on
Employment Determination in Unionised and
Non-Unionised Firms: Firm Level Evidence for the
LICOS, Centre for Transition Economics, Economics Department, Katholieke Universiteit Leuven,
Belgium, and CEPR, London, U.K.
PATRICK PAUL WALSH
Trinity College, Department of Economics, Dublin, Ireland, and LICOS, Centre for Transition
Economics, Katholieke Universiteit Leuven, Belgium
Abstract. In this paper we investigate the effect of increased competition on employment in
unionised and non-unionised ﬁrms. We model product and labour market imperfections, and their
interactions, in Nash equilibrium. The model predicts that employment loss in unionised ﬁrms in the
face of increased competition will be lower compared with non-unionised ﬁrms. This paradoxical
outcome results from an offsetting beneﬁcial employment effect of competition, which eliminates
wage mark-ups in unionised ﬁrms. We ﬁnd empirical support for the theoretical prediction using
U.K. ﬁrm level data over the period 1985–1989.
Key words: Competition, employment dynamics, unionised and non-unionised ﬁrms.
JEL Classiﬁcation: FOO, LOO and JOO.
The present paper is concerned with analysing the short-run impact of increased
competition on ﬁrm level employment in unionised and non-unionised ﬁrms. The
central theme of this paper is a theoretical and empirical demonstration of the
importance of product and labour market imperfections and their interactions in
assessing the impact of competition on ﬁrm level employment dynamics. A num-
ber of papers have already highlighted the importance of such spillovers between
We thank Mike Harrison, George Symonides, Patrick Van Cayseele, Ciara Whelan and two
anonymous referees for useful comments on earlier versions of the paper. Special thanks go to Paul
Gregg, for providing us with the data. The paper beneﬁted from suggestions given at seminars at
Leuven, Ufsia, Antwerp and the EARIE conference. Konings acknowledges ﬁnancial support of the