Review of Industrial Organization 15: 183–200, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
The Spillover Effects of Industrial Action on Firm
JAMES TED McDONALD
Department of Economics, University of Tasmania, Hobart, TAS 7001, Australia
Department of Economics, Curtin University of Technology, Perth 6000, Australia
Abstract. While it is generally accepted that strikes can have a negative impact on a ﬁrm’s per-
formance, the direct effects of a strike on the affected ﬁrm may be only one component of the
total impact resulting from the action. The existence of indirect or “spillover” effects can also have
important implications for the economic performance of competing ﬁrms. This paper uses a panel
of ﬁrm-level ﬁnancial and strikes data for a large sample of ﬁrms in Australian manufacturing to
determine the extent of direct and spillover effects of industrial action.
Key words: Unions, strikes, proﬁtability, price-cost margins, oligopoly.
Assessing the impact of industrial action is complicated by the fact that strikes at
a particular ﬁrm may affect the performance of other ﬁrms that are not directly
involved in the dispute. Speciﬁcally, disruptions to production at one ﬁrm arising
from a strike may actually improve the proﬁtability of competing ﬁrms. If so, then
the impact of a strike on the performance of the affected ﬁrm will overstate the
impact of the dispute at the industry level.
Previous Australian studies of the determinants of industry proﬁtability have
neglected the role of labour market variables, such as the incidence of strikes,
focusing instead on market structure and foreign competition (see, for example,
Round, 1980; Bhattacharya and Bloch, 1997). We extend the scope of study by
estimating both the direct and indirect effects of industrial action on ﬁrm prof-
Helpful comments have been provided by Jeff Borland, participants at the 1997 Australian
Conference of Economists, seminar participants at the Department of Economics at the University of
Tasmania and two anonymous referees of this journal. Alexis Wadsley provided excellent research
assistance. Financial assistance from an ARC Small Grant is gratefully acknowledged.
There may also be negative spillover effects of industrial action that may occur when disruptions
to production at a ﬁrm also impact negatively on ﬁrms that either supply the affected ﬁrm with inputs
or depend on the affected ﬁrm for outputs. This dimension of the problem is not considered further
in the current paper, but is the subject of ongoing research by the authors.