Firms and Unions

Is firm growth always positively linked to higher wages? How does technological progress affect the relationship between firms and labor unions? This paper offers the first analysis to explain this interplay, reproducing the empirical patterns observed in the data. We introduce a general equilibrium model showing how firm growth, driven by general-purpose technologies, initially raises both firm size and wages. Beyond a firm-size threshold, firms transition to labor-substituting technologies, like automation, due to their ease of scalability, which, contrary to the predictions of neoclassical growth models, results in stagnating wages despite further firm growth. The progression to automation is delayed in industries with entry barriers. The increased ease of substituting labor diminishes the union-extractable rents, reducing the benefits of unionization. By incorporating automation's impact, we revise the view of unions as rent-seeking entities, offering a novel perspective on how automation reshapes union rents and labor dynamics