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In this chapter, we propose a theoretical assessment of the relationship between unions and investments. We develop a simple model where a firm chooses its investment level anticipating the employee's effort choice and the outcome of wage bargaining. First, and consistently with the holdup view, we find that the union's bargaining power has a negative effect on the accumulation of fixed capital. Second, we show that this negative effect is mitigated by the voice ability of unions to ease the displeasure of exerting effort. Hence, when the voice ability of unions is strong vis-à-vis their bargaining power, the holdup view does not necessarily survive, and unionized firms invest more than their nonunionized competitors.

We present theoretical and empirical evidence challenging early studies that found unions were detrimental to workplace innovation. Under our theoretical model, unions prefer product innovation to labor-saving technological process innovation, thus making union wage bargaining regimes more conducive to product innovation than competitive pay setting. We test the theory with population-representative workplace data for Britain and Norway. We find strong support for the notion that local bargaining leads to product innovation, either alone or together with technological innovation.