Labor policy and investment: Evidence from Canada

Some critics of proposed legislative labor policy changes contend that laws favoring labor would adversely affect business investment. Research on labor policy, however, often assumes that investment is fixed. The authors present a sequential bargaining model in which labor policies that increase labor's bargaining power and reduce management's options during strikes are predicted to reduce investment. The results of an analysis of provincial data on investment for 1967 to 1999 indicate that strike replacement bans and protections for workers who refuse to handle struck work did indeed reduce new investment, especially within the first few years after the policy change. Particularly sensitive was building construction investment, which declined by about as much when a labor policy benefiting labor was enacted as it would be expected to decline in a recession.