Thursday, May 16, 2013

16/5/2013: Euro Area 'Austerity' in One Chart

Frankly, folks, there is nothing like making a factual argument across emotive subject lines... I have put up two posts on Euro area 'austerity' - here and here - and the readers want more numbers, usually in hope of finding a hole in my arguments.

Here is, perhaps a better, summary of the Euro area Austerity in its own numbers - in levels of nominal expenditure and revenues:


I hope this settles the issue:

  1. Euro area austerity has meant revenues collected by the governments are up
  2. Euro area austerity has meant that Government spending is up
Tell me if this is a 'savage cuts' story or a 'tax burden rising' story...

Wednesday, May 15, 2013

15/5/2013: Italy v Spain in Big 4's Sickest Economy contest

More unpleasant stuff from the Euro zone. Headlines in the morning today:

  • Italian banks suffer the worst credit crunch in their history with banks credit down 2.12% in March 2013 y/y, according to the Italian Banking Association (ABI);
  • Meanwhile, bad loans have reached €64.3bn in March, rising by 4.3% y/y and by 33% m/m. 
  • Italian banks loans to households and non-financial companies dropped 3.1% in March y/y, falling to €1.46bn. 
  • Italian industrial production fell 5.2% in March y/y, the worst figure in the Eurozone’ Big 4 economies. Industrial production was down 1.5% in Germany in March and 1.6% in France.
  • The Italian housing market activity its now at lowest level since 1985. Last year 448,364 properties were sold, or 27.5% fewer than in 2011 and only 18,000 ahead of 1985 sales. 

It looks like Italy is going head on into competing with Spain for the title of the Big 4's sickest economy.

15/5/2013: Straight from 1984... The Department of Stabilisation...


Fir the fun of reading between the lines, follow my italics:

"IMF Executive Board Approves €1 Billion Arrangement Under Extended Fund Facility for Cyprus

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 891 million (about €1 billion, or US$1.33 billion; 563 percent of the country’s quota) arrangement under the Extended Fund Facility  (EFF) for Cyprus in support of the authorities’ economic adjustment program. [Given that Greece has more than double time to 'repay' its 'facilities' and Cyprus is likely to face an economic collapse worse than that experienced in Greece, good luck betting on that 3-year window not staying open less than a decade] The approval allows for the immediate disbursement of SDR 74.25 million (about €86 million, or US$110.7 million).

The EFF arrangement is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilize the country’s financial system [completely destabilised by the Troika arranging 'stabilisation' of the Greek economy], achieve fiscal sustainability [by pushing the GDP down by close to 13% in 2013 and likely another 15% by the end of the 'stabilisation' period], and support the recovery of economic activity [devastated by the Greek 'rescue' by the Troika and botched 'rescue' of Cyprus] to preserve the welfare of the population [who now need welfare as their jobs and savings are being vaporised by the economic 'stabilisation' measures of the Troika]."

15/5/2013: What IMF assessment of Malta has to do with Ireland?

Here's an interesting excerpt from the IMF Article IV conclusions for Malta, released today (italics are mine):

"In the longer term, regulatory and tax reform at the European or global level could erode Malta’s competitiveness. The Maltese economy, including the financial sector and other niche services, has greatly benefitted from a business-friendly tax regime. Greater fiscal integration of EU member states and potential harmonization of tax rates could erode some of these benefits, with consequences on employment, output, and fiscal revenues."

Now, Ireland is a much more aggressively reliant on tax arbitrage than Malta to sustain its economic model and has been doing so for longer than Malta. One wonders, how come IMF is not warning about the same risks in the case of Ireland?


Another thing one learns from the IMF note on Malta: "The largest banks will be placed under the direct oversight of the ECB from 2014. The MFSA should work closely with the ECB to ensure no reduction in the supervisory capacity of these banks."

Wait, we've all been operating under the impression that direct oversight from ECB is designed to increase quality and quantity of oversight. Quite interestingly, the IMF is concerned that it might reduce the currently attained levels of supervision.

Tuesday, May 14, 2013

14/5/2013: Ending German Austerity... and then what?

Everyone is running around with the latest catch-phrase designed to phase out thought: Germany must end austerity. So, folks, what will happen should Germany really end austerity?

Whatever it might mean, suppose end of austerity implies Germany moves from the currently projected general government deficit of -0.31% of GDP to a deficit of -3.31% of GDP, thus increasing Government spending by EUR81 billion in 2013. What then?

  1. Historically (since 1997 through forecast for 2018 by the IMF) EUR1 billion increase in German GDP is associated with EUR0.21 billion rise in German Current Account, although the relationship is not strong enough to call it statistically. In other words, Germans do not spend their surpluses on goods, like other economies do. They are more likely to increase their current account surpluses when income rises.
  2. Also, historically, EUR1 billion in German GDP growth is associated with EUR0.67 billion rise in German investment. 
  3. Furthermore, shrinking Government deficits in Germany are associated with widening of current account deficits (see chart below) and declining overall investment in the economy
  4. EUR81 billion in the euro area overall context is nothing but pittance, even before it gets diluted by German own internal demand.

Note: Change in current account balance is negative when current account deficit is falling

Let's not draw many causal conclusions out of the above, but the clear thing is: Germans do not tend to spend their budget deficits on imports of goods and services at any rate worth mentioning.

Herein rests the problem for the policy idiots squad: if Germans spend EUR81 billion more on Government, short of mandating that Berlin ships cheques out to the Euro Periphery, what on earth will this end of austerity do to help Ireland, Portugal, Spain, Greece or Italy? Add German tourists' bodies on the beaches of Italy and Greece? Fly truckloads of German youths to Spain for booze-ups? Increase sales of Fado music 700-fold? Restart bungalows sales craze in Lahinch? Open German savings accounts in Cyprus? Will these end Euro area periphery crises?

Neither one of the countries in the Euro periphery makes much of what Germans want. Irish trade with Germany is robust, but it is dominated heavily by the non-Irish corporates who channel tax arbitrage via trade, leaving little on the ground in Ireland to call 'national income'. 

So what if Germany 'ends austerity'? German demand for goods and services will go up. But it will be demand for German-made and Core-made goods and services, plus stuff from Asia Pacific. It will also push German unemployment from 5.6% to 5.4% or maybe 5.3%, depending on how many more peripheral countries' emigrants Germany can absorb. 

These might be good things for Germany. But sure as hell, if German stimulus were to work like neo-Keynesianistas hope it will, pressure on ECB to keep rates low and banks liquidity ample will be reduced, while internal German rates imbalance will amplify. German bond yields might also rise, which will only add to the already hefty debt servicing pressures in euro periphery. Does anyone think it might be a good idea for ECB to hike rates then? No?

Truth is - there is no substitute for getting Euro periphery's economies in order. German stimulus or 'end of German austerity' can sound plausibly nice, but the real problem in the EU is not German sluggish demand (it is a part of German problem, to be frank, but not the major one when it comes to the Euro area as a whole). The real problem in the EU is lack of real, tangible, non-leveraged growth sources.

14/5/2013: Corporate Tax Haven Ireland Weekly Links Page

Corporate Tax Haven Ireland in the news... again:
http://www.bloomberg.com/news/2013-05-13/europe-eases-corporate-tax-dodge-as-worker-burdens-rise.html

Update: Twitter in the news: http://www.telegraph.co.uk/technology/twitter/10056570/Twitter-CEO-resigns-as-UK-boss-after-accounting-fiasco.html
Note Irish connection.

Keep track of 'Tax Haven' view of Irish economic policies by following the links, starting here:
http://trueeconomics.blogspot.ie/2013/05/352013-not-week-goes-by-without-tax.html

Update 17/5/2013:
Three more stories, both relating to Google operations in Ireland:
http://www.independent.co.uk/news/business/comment/ben-chu-lets-not-get-bamboozled-by-google-in-the-global-tax-avoidance-debate-8620046.html
and
http://www.guardian.co.uk/technology/2013/may/16/google-told-by-mp-you-do-do-evil
and
http://www.independent.ie/business/irish/no-apology-for-low-tax-regime-as-google-debate-drags-on-richard-burton-29274843.html

I find it bizarre that Minister Bruton feels anyone on earth is asking for Ireland's apology. I think the point of this debate about the role of tax havens, like Ireland, is that policymakers around the world are seeking to close the loopholes through which companies engage in aggressive tax optimisation. Minister Bruton should focus on how Ireland can deal with this threat, as well as on how Ireland can develop a business platform (low tax is an important part of this platform) that actually operates on adding value here and not on beggaring our trading partners.

Minister Bruton's point about the need to create jobs in Ireland is nonsensical in the above debate. If we create jobs here on foot of value added in the Irish economy, then there is no problem with our MNCs activities globally, because low tax regime applies only to value added created here. Our trading partners have a problem with Ireland acting as a conduit for tax minimization whereby there is zero value added created in Ireland, but instead value added created elsewhere is booked via Ireland into tax havens. These forms of tax arbitrage do not create any jobs here in Ireland and generate no tax revenue here.

14/5/2013: Sunday Times May 12, 2013: UK, Europe and Ireland


This is an unedited version of my article for Sunday Times, May 12, 2013.

Loosely based on the famous quip by the US ex-Secretary of Defense, Donald Rumsfeld, uncertain events that present significant risks of disrupting the established status quo can be classed into three categories: the unknown knowns, the known unknowns, and the unknown unknowns.

The former category represents risks we can continuously monitor, assess and price in our policy decisions and everyday lives. For example, a known presence of foreign exchange risk relates to the unknown bilateral exchange rate price, prompting investors and businesses alike to hedge against the potentially adverse changes in the rate.

At the other extreme, the unknown unknowns are what Nassim Taleb called the 'Black Swans'. Neither the extent of their impact, nor the nature of the risk they present are known to us, making hedging against such risks completely impossible.

The case in between the two extremes relates to the uncertain events often called the 'Grey Swan'. This is the most challenging of all forms of uncertainty. On the one hand we know that something very disruptive can happen in the case of approaching risk, but we have no ability to gauge with any precision as to the extent of this risk.

The best current example of such a 'Grey Swan' from Ireland's perspective is the uncertainty surrounding the future of the UK participation in the EU.

Consider first the background that shapes the risk. Aside from significant cultural, historical, institutional and familial links between the two countries, Ireland shares physical and maritime borders with the UK.

As the result of the above links, the UK today is a singularly the largest trading and financial investment partner for Ireland, as far as bilateral trade between nation states is concerned.

In 2012, bilateral merchandise trade between Ireland and the UK stood at EUR 31.7 billion, 23.5% more than our merchandise trade with the US and Canada combined. Ireland-UK trade flows in goods amounted to 61% of our bilateral trade with the entire EU27 (excluding the UK). Ireland's bilateral trade with the UK in services amounted to EUR 25.2 billion in 2011 - the latest year for which data is available. This places the UK as the second largest services trading partner for Ireland after the US. Ireland's trade balance in services with the UK is in strong EUR 5 billion annual surplus, contrasting a trade deficit of EUR 19 billion in our services trade with the US.

On investment side, in 2011, Irish residents held some EUR 261 billion of UK portfolio securities, representing second largest portfolio of overseas investments after those in the US. Of these, over EUR 170 billion of securities related to Irish private sector non-financial corporations' assets. While Irish resident banks deleveraging saw their UK assets holdings fall from EUR140.5 billion in 2009 to EUR 90.4 billion in 2011, Irish resident corporate holdings of UK assets rose from EUR 120.2 billion to EUR 170.2 billion. Irish FDI into the UK at the end of 2011 stood at EUR 50.2 billion against UK FDI into Ireland at EUR 22.2 billion, making the UK our second largest bilateral FDI partner.

The trade and investment links are built on a complex web of economic and institutional inter-connections between our two countries. In addition to direct services trade figures, bilateral economic relations between Ireland and the UK extend to include shared services provision. For example, Irish IFSC heavily dependent on providing back-office and other specialist support to the UK-based institutions. Likewise, our research and development, education and other core professional services and functions rely heavily on institutional cross-links with the UK universities, professional services and research firms and clients.

Beyond purely economic ties, the UK position within the EU is more closely aligned to that of Ireland and our interest than for any other member state.

Both, Ireland and the UK share in the common agenda of seeing increased liberalisation in trade in services across the EU, and in accelerating the painfully slow process of implementation of the EU Services Directive. Both economies, focused on developing new markets and increasing global reach of their industries, require significant autonomy within and devolution of the EU policymaking. In more ways than Dublin is willing to admit, the UK position within the EU as an independently-minded, skeptical and cautious player that constantly acting to test the EU decisions against national economic and social interests serves Ireland much better than the Continental modus operandi of serial surrender of national interests to German and French diktat.

In other words, like it or not, Dublin is closer to London than it is to Berlin. Looking beyond the current crisis, this proximity is based on an equal partnership and symmetry of objectives, rather than on hierarchical hegemony of geopolitical power that is shaping the rest of the EU.


This realisation presents us with a dilemma. A UK referendum on the country continued membership in the EU can lead only three possible outcomes, all with serious implications for Ireland.

In the best-case scenario, UK achieves successful renegotiation of the terms and conditions for its membership in the EU. This will result in the UK continuing to position itself as a cautious outsider to the European core, providing counterbalance to Franco-German axis of geopolitical and economic power that smaller states with strong pro-growth interests, like Ireland, require in order not to succumb to dictate from Berlin or Brussels. This will also mean that our trade and investment links with the UK can continue offering us risks and markets diversification opportunities that we have enjoyed to-date.

In a less benign scenario, the UK remains in the EU, while failing to renegotiate its membership conditions. In this case the UK will be required to rapidly converge with the Continental core on major policies. These will include reforms of corporate taxation codes, harmonisation of other tax systems, and regulatory systems and enforcement institutions consolidation. The result will be reduced diversification of European institutions and increased vulnerability of these institutions to adverse economic and political shocks. Greater centralisation of power and decision making in Berlin and Paris, with London joining the Core, will leave Ireland on the margins of Europe alongside a small number of other demographically younger and economically more dynamic countries, such as Finland, Sweden, and the Netherlands. UK’s inevitable joining of the euro will seal the end of Irish economic model of providing a platform for trade and investment entry into the euro area.

The worst-case scenario, however, is that associated with the possibility that the UK might exit the EU. Even if unlikely, this outcome deserves some serious consideration if only for the impact it can have on Irish economy.

An exit can trigger an outright trade war and capital flows controls between the EU and the UK. There is little love lost between German and French elites and the UK position within Europe, and past experiences with Norway, Switzerland, Lichtenstein and Bulgaria show that EU is capable of acting as a bully in the schoolyard. The consequences of such a conflict will be disastrous for Ireland.

Trade flows disruption, while not necessarily cutting off all exports and imports between the two countries, can shave off as much as 5 percentage points of our GDP overnight. In the longer-run, the impact of reduced joint projects development and co-shared services provision across the border will further reduce our access to the UK markets.

Disruptions to co-located financial services, from banking to pension funds, investment funds and insurance business, as well as in retail, logistics, and wholesale sectors will be significant. Rising cost of services, associated with lower competitive pressures, will benefit some Irish vested interests, such as a number of our semi-state companies, but at the expense of all consumers.

Changes within the EU in the wake of a possible UK exit will undoubtedly harm Irish economic growth prospects. Absent the UK critical assessment and testing of the EU drive for integration and enlargement, Brussels will be free to pursue aggressive tax reforms along the lines currently being developed under the 'enhanced cooperation' procedures by Berlin and Paris. The EU Services Directive agenda will be killed off completely by Paris and Berlin, neither of which want to see increased competition in protected services. Even in its current initial stage the directive promises to boost Irish GDP by 0.5-1% per annum. Research from Open Europe, published this week, estimates that Ireland can gain up to 2.1% of GDP from enhanced liberalization of trade in services beyond the current Services Directive.

Long run impact of the UK adopting a direct competitive stance vis-a-vis the EU can cost Ireland up to 10-12 percentage points off our economy's potential output with little on offer to replace this lost activity.

Bleak as the picture above might be, it offers a clear direction for Irish position vis-a-vis the ongoing debate within the UK and in Europe about both the role of our closest neighbour in the European project and the future of the EU itself.

Ireland needs a strong UK that continues to act as check and balance on the EU's persistent drive toward more integration and bureaucratization of the common policies and governance space. Ireland also needs a strong EU with diversified and flexible institutions capable of absorbing various shocks and creating a functional policies laboratory for possible responses to adverse global and internal challenges. We to support continued UK participation in Europe while respecting our neighbor’s national agenda by encouraging the EU to proactively engage with London in modernizing the terms of the UK membership within the EU.




Box-out:

The 2013 QS University Subject Rankings published over the last few weeks should provide some food for thought for Ireland’s higher education mandarins. From the top of the rankings, only one Irish university, Trinity College, Dublin (ranked 67th in the world) makes it into top 100, with our second-best university, UCD, ranking in 131st place. UCC (ranked 190th) completes the trio of Irish universities in top 250 worldwide institutions. In subject rankings, Irish universities are performing poorly across a number of core disciplines. In Mathematics, Environmental Science, and Earth and Marine Sciences no Irish University ranks in top 150. In Chemistry, TCD is the only university to make top 100. No Irish university makes global rankings in Materials Science. No Irish university ranks in top 100 in Physics and Astronomy, Chemical Engineering, Civil and Structural Engineering and in Electrical and Electronic Engineering. TCD is the only university in Ireland with a Computer Science and Information Systems faculty ranked in top 100. The list of mediocre results goes on and on. Put simply, Ireland needs a complete overhaul of its higher education system if we were to even being matching the Government rhetoric about the quality of our workforce with reality.

14/5/2013: The Sick Man of Europe is... Europe


An excellent set of stats on the decline of public legitimacy of the EU between 2012 and 2013 from Pew Research: http://www.pewglobal.org/2013/05/13/the-new-sick-man-of-europe-the-european-union/

Certainly worth a read and confirms similar trends captured by other surveys.

14/5/2013: Negative Equity and Entrepreneurship: Local Evidence from the US


I have written before about the role positive/negative home equity has on entrepreneurship and real economic activity. Remember, the Irish Government and media believe that negative equity matters only when/if the household wants or needs to move home and that it has no effect outside this scenario.

A recent (March 2013) paper (linked below) from NBER argues very clearly that positive/negative equity has a real positive/negative effect on employment and business creation and that this effect is local to property prices region. In other words, unlike FDI or other foreign investments, home equity impacts domestic investment, locally anchored, and with it - domestic jobs creation.

Adelino, Manuel, Schoar, Antoinette and Severino, Felipe paper "documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation."

Some more granularity to the top-level results [italics are mine]:

"Overall, the evidence we present in this paper identifies the causal effect house prices in the creation of new small firms. These results show that access to collateral allowed individuals to start small businesses or to become self-employed. We conjecture that without access to this collateral in the form of real estate assets, many individuals would not have made the transition from unemployment to starting a new business or self-employment.

We show that the effect of house prices is concentrated in small firms only and had no causal effect  on employment at large firms. [In other words, there is no measurable effect on location competitiveness from house prices. Irish Government claims that residential property prices declines improved Irish competitiveness are not supported by the evidence from the US.]

Importantly, our results also hold when we exclude industries that are most likely to be affected by local demand shocks and when we restrict our attention to manufacturing industries. The effect of house prices is also stronger in industries where the amount of capital needed to start a new firm is lower, consistent with the hypothesis that housing serves as collateral but is not sufficient to fund large capital needs." [This goes to the issue of which types of firms creation benefit most from collateral access. The evidence suggests that smaller firms do so. But the fact that capital constraints bind also suggests that by typology, services firms, which are human capital intensive and require low levels of physical capital, benefit also more than average. Now, Ireland is human capital intensive economy, so draw your own conclusions.]

Adelino, Manuel, Schoar, Antoinette and Severino, Felipe, House Prices, Collateral and Self-Employment (March 2013). NBER Working Paper No. w18868. Available at SSRN: http://ssrn.com/abstract=2230758

Monday, May 13, 2013

13/5/2013: Banks Reputation Matters... for Borrowers too


Why banks reputations matter outside the interbank funding markets and regulatory offices? A question that is, perhaps, somewhat distant for Irish bank zombies, but ultimately the answer is not. It turns out, bank's reputation matters to the corporate borrower. And it matters materially.

Here's an interesting paper on this from Ongena, Steven R. G. and Roscovan, Viorel (see link below). As usual, italics are my own.

The authors argue that "banks play a special role as providers of informative signals about the quality and value of their borrowers. [Which is sort of trivial, when considered on 'accept' vs 'reject' or 0:1 basis. A '0' or 'reject' loan application signal provides information to the firm and to investors when the latter can observe the outcome of an application that the firm might be not as credit worthy as previously believed.]

Such signals, however, may have a quality of their own as the banks' selection and monitoring abilities may differ. [In other words, here's the core hypothesis: take two banks. Bank A has a lower capacity to price risk inherent in the firm than bank B. Over time, bank A repetitional capital should be lower than bank B. Now, firm 1 applies for a loan with A and B and gets rejected by B and accepted by A. Another firm, call it firm 2, applies for same loan and get accepted by B. Clearly, if the quality differential between A and B are known to the market, information about firms 1 and 2 experiences in applying for loans should matter in valuing firms 1 and 2.]

Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors' assessments of firms' credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to US firms over the period of 1980–2003.

We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm's headquarters state. Investor reaction is, in fact, the largest when the bank is foreign.

Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. [Confirming the core hypothesis above]"

Which is yet more bad news for Irish banks and the corporates stuck with them... and another reason why the banks reforms should deal with reputational fallout of this crisis as much as with macroprudential risks and regulatory capital cushions.


Ongena, Steven R. G. and Roscovan, Viorel, Bank Loan Announcements and Borrower Stock Returns: Does Bank Origin Matter? (June 2013). International Review of Finance, Vol. 13, Issue 2, pp. 137-159, 2013. http://ssrn.com/abstract=2262145

13/5/2013: Work Hours, Education Years and Wages


A fascinating fact: "An average person born in the United States in the second half of the 19th century completed 7 years of schooling and spent 58 hours a week working in the market. In contrast, an average person born at the end of the 20th century completed 14 years of schooling and spent 40 hours a week working. In the span of 100 years, completed years of schooling doubled and working hours decreased by 30%."

Restuccia, Diego and Vandenbroucke, Guillaume ask "What explains these trends?"

Their paper (link below) quantitatively assessed "the contribution of exogenous variations in productivity (wage) and life expectancy in accounting for the secular trends in educational attainment and hours of work."

And the result? "We find that the observed increase in wages and life expectancy accounts for 80% of the increase in years of schooling and 88% of the reduction in hours of work. Rising wages alone account for 75% of the increase in schooling and almost all the decrease in hours in the model, whereas rising life expectancy alone accounts for 25% of the increase in schooling and almost none of the decrease in hours of work."

Restuccia, Diego and Vandenbroucke, Guillaume, A Century of Human Capital and Hours (July 2013). Economic Inquiry, Vol. 51, Issue 3, pp. 1849-1866, 2013. http://ssrn.com/abstract=2261571

Aside 1: note that higher wages (when aligned with higher productivity) imply higher human capital intensity and lower hours of wrok supplied.

Aside 2: there seem to be no control for the reporting of hours supplied. In mid-19th century and even in first half of 20th century, most of work performed was time-sheeted. Today, majority of us do not have time cards, so on the surface, our contracts say 40 hours per week, in reality this means 60 hours per week.

13/5/2013: Unionisation and Innovation: Firm-level Data


A very interesting paper on the effects of unionisation of the workforce on firm-level innovation (italics are mine).

The authors find that "patent counts and citations, proxies for firms’ innovativeness, decline significantly after firms elect to unionize and increase significantly for firms that vote to deunionize. To establish causality, we use a regression discontinuity design relying on “locally” exogenous variation in unionization generated by union elections that pass or fail by a small margin of votes. The market reaction to firms that elect to unionize is negatively related to firms’ past innovation output [So if a firm had above average innovation output before the unionization, market reacts to bid down the firm value post-unionization in anticipation of the adverse impact]. Our evidence suggests unionization stifles innovation."

Slightly more specifically: "For instance, innovation quantity (quality) of firms that pass union elections within a margin of 2 percentage points is 42.8% (40.4%) lower than that of firms that do not pass union elections within a margin of 2 percentage points three years subsequent to union elections. We also estimate RDD on a sample of private firms over the same period. Consistent with our results for public
firms, we find that private firms’ innovativeness is negatively related to unionization."

Interestingly: "we attempt to identify possible underlying economic channels through which unionization impedes firm innovation. Inconsistent with the conventional view, we find little evidence that investment in R&D changes as a result of unionization. Our results suggest that the channel through which unionization impedes innovation is not an underinvestment in innovation input (i.e., R&D), but rather a decline in innovation productivity."

The whole paper is available here: Bradley, Daniel J., Kim, Incheol and Tian, Xuan, Providing Protection or Encouraging Holdup? The Effects of Labor Unions on Innovation (May 10, 2013). http://ssrn.com/abstract=2232351