Organized Labor and Inventory Stockpiling

Abstract

The literature suggests that the presence of a labor union poses operational risk for firms by reducing operating flexibility. We posit that managers stockpile inventory in response to their heightened operational risk, such as potential strikes, so that managers maintain bargaining power in labor negotiations. Using various union and abnormal inventory measures, we find that union strength is positively associated with firms’ inventory holdings. The association is more pronounced (1) if the employees are more skilled and highly paid and therefore are harder to replace, (2) if the firm belongs to a more competitive industry in which inventory stock-out is more detrimental, and (3) if the firm’s operating cycle is longer. In addition, we find that the excess inventory accumulated because of a union is detrimental to future performance. Finally, based on the premise that perceived operational risk is made evident by a strike’s occurrence, we predict and find that firms’ abnormal inventory significantly increases after strikes.

Keywords: labor union, inventory, investment efficiency, strike

JEL Classification: G31, J52, J53