Unions vs legislation

We need stronger trades unions. This is my reaction to the calls at Left Foot Forward for a “living wage.”

I say so because union bargaining strength is a better way of raising wages than legislation. This is because minimum wage laws are inflexible. They apply both to cash-rich firms that could raise wages without cutting jobs and investment, and to firms on the margin of profitability that would close down if labour costs rose. (Yes, the left exaggerates the prevalence of the former just as the right exaggerates that of the latter.) Living wage laws can’t distinguish between these cases. But union bargaining can. Strong trades unions, then, are better able than laws to raise wages without job loss.

The same is true for other forms of labour regulation: health and safety, working time and suchlike. Union bargaining can protect workers more flexibly than “one size fits all” laws. It can distinguish between cases where regulation would be too costly and where it wouldn’t.

In this sense, legislation and unions are alternatives. It is no accident that the UK introduced  minimum wage laws in 1999, after trades unions were weakened, and that this weakness has been followed by more “red tape“ on firms.

A paper by Philippe Aghion and colleagues formalizes this. They point out that there is a negative correlation between union strength and minimum wage laws. Scandinavian countries have traditionally had strong unions but little wage legislation, whilst Greece, France and Spain have weaker unions but tighter minimum wages. And which countries have usually had the healthier labour markets?

This is not to say that unions are a panacea. The problem with them is not so much the Thatcherite-Hayekian one that the undermine the rule of law - given the inflexibility of the law, this is a benefit of them, not a cost. It is that, in the UK, traditionally, unions were better at advancing the interests of skilled and semi-skilled workers than the most disadvantaged ones; they heyday of unions was not a great time for black or female workers.

What I am saying, though, is that we lost something valuable when unions declined. Worse still, as Aghion and colleagues point out, we might not get it back, because legislation crowds out the cooperation and self-reliance that produces healthy unions.

Herein, though, lies a paradox. Logically, one might imagine that Conservatives especially would lament the decline of unions. They represent self-help and a flexible, non-statist alternative to the heavy hand of government intervention - the “Big Society“. And yet this sentiment is absent. It’s enough to make one suspect that the Tories’ only principle is a pig-headed hostility to working people.

Comments

[Tim Almond]

Logically, one might imagine that Conservatives especially would lament the decline of unions. They represent self-help and a flexible, non-statist alternative to the heavy hand of government intervention - the “Big Society“.

How are unions about self-help? Sure, they might raise wages, but how long is that going to last after a non-unionised competitor comes along and can undercut you on price, and be more flexible in how labour is used within the business? (evidence from BA, Rover, GM and others seems to suggest that non-unionised businesses perform better).

[Tim Worstall]

"I say so because union bargaining strength is a better way of raising wages than legislation."

Full employment being better than either......

[BT]

It's wrong to portray conservatives as wanting anti-statist solutions.

They *say* they don't like the state when it suits them (e.g.: on social welfare). But they are happy to embrance the state fully when it suits them (e.g.: on corporate welfare).

Unions are a non-state way of addressing harmful inequality. Conservatives don't like unions because business owners and managers who can't see past their own unenlightened self-interest don't like them.

See Dean Baker:
http://deanbaker.net/index.php/home/books/the-conservative-nanny-state

http://www.deanbaker.net/index.php/home/books/the-end-of-loser-liberalism

[chris]

@ Tim A - the evidence that unions depress firm performance is very mixed, eg:
http://econpapers.repec.org/paper/cepcepdps/dp0539.htm
http://econpapers.repec.org/article/iabiabzaf/v_3a40_3ai_3a4_3ap_3a361-381.htm
@ Tim W - agreed. But the magic money fairy is even better than full employment, and about as likely.

[John H]

Yes, it's struck me a few times that the Tories ought to be careful what they wish for when they call for a "bonfire of employment legislation".

Not just minimum wage laws, but laws against unfair dismissal and other employment protection laws have done a lot to make people feel that they don't "need" unions. Once they lose the protection of the "nanny state", they may well gravitate back towards "Big Society" solutions.........

[Phil Ruse]

This "...Tories’ only principle is a pig-headed hostility to working people" is a real pity because it makes no sense. Isn't it about time we grew out of the "monster under the bed" dialogue?

[ejh]

"evidence from BA, Rover, GM and others seems to suggest that non-unionised businesses perform better"

Eh?

[Chris]

We need a minimum wage AND incredibly strong trade unions. Perhaps strong unions can provide good wages for workers in larger businesses, but what about people who work for small enterprises? It's hard (though it should not be impossible) for unions to penetrate such businesses, but those workers need protection as much as anyone else.

[Richard]

"And yet this sentiment is absent. It’s enough to make one suspect that the Tories’ only principle is a pig-headed hostility to working people."

Or memories of the 1970s?

In my view the free market approach to unions should not be to regulate them as Mrs Thatcher did but merely remove any special legal immunities they have.

[Tonylo]

I always enjoy your blog. One niggle is that when you have talked in the past about the effect of various cognitive biases in the business environment. But doesn't it seem that trade unions (in particular their leaders) are susceptible to exactly the same biases?

[Blissex]

«One niggle is that when you have talked in the past about the effect of various cognitive biases in the business environment. But doesn't it seem that trade unions (in particular their leaders) are susceptible to exactly the same biases? »

My impression is that our blogger is not thinking of unions as managed by philosopher kings with better understanding and greater good orientation, but of as a counterweight, however imperfect, to the overdomination of the labor market by business, however imperfect too.

[Blissex]

«"I say so because union bargaining strength is a better way of raising wages than legislation."

Full employment being better than either......»

Our blogger and a commenter once pointed out the excellent book on the postwar economy by Glyn, "Capitalism Unleashed":

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2007/12/andrew-glyn.html

and one of its arguments is similar to the one by Kalecki:

http://bilbo.economicoutlook.net/blog/?p=11127

The argument is that full employment gives too much power to workers, depresses profits, and since rich enough people use profits as a way to keep score in some kind of "fantasy finance" game, they stop plotting world domination, pick up their toys and go back to their mansions, and this depresses economic activity.

Because some pushy maniacal egotists (#1 exhibit: Jobs) really do drive organizations and the economy forward, and do keep score with "money points", even if they are not as exquisitely sensitive to marginal tax rates as the propaganda says.

My personal preference is a combination of counterweights:

* widespread but not very powerful unions, to protect individual members from abuse and to negotiate collectively but without NUM style temptations to take political power;

* not quite full employment, to allow workers to have good chances of changing jobs but without giving them too much security;

* a reasonable level of unemployment stipend, so that people who are sacked or choose to drop out of the labour market for a while can live without worry thus avoiding too much pressure on jobs.

* businesses being fairly free to sack workers with some compensation, but with unions and a decent stipend as per above, to allow the ability to reorganize without being able to blackmail workers with the threat of individual or mass sackings.

The above is sort of the Danish model, which seems to be working fairly reasonably.

Unfortunately this would require a lot of "F*ck YOU! I am sorted" Mail/Telegraph readers to think carefully about their true interests. Not likely.

Unions are a more plausible second best. In the USA as J. K. Galbraith says in "The Great Crash 1929" they were nurtured by the New Deal as an anti-depression device, to fight to keep workers numbers and salaries from falling too much during bad times and thus causing huge negative demand shocks, and to provide campaign funds supporting more egalitarian policies.

Unfortunately in the USA too many of them devolved into obstructionist guilds like in the UK and other countries, and public opinion turned (with the help of the idiots of PATCO and NUM and propaganda) against them, and in favour of proprietor and capital-gains friendly politics.

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The above is sort of the Danish model, which seems to be working fairly reasonably.

Unfortunately this would require a lot of "F*ck YOU! I am sorted" Mail/Telegraph readers to think carefully about their true interests. Not likely.

Unions are a more plausible second best. In the USA as J. K. Galbraith says in "The Great Crash 1929" they were nurtured by the New Deal as an anti-depression device, to fight to keep workers numbers and salaries from falling too much during bad times and thus causing huge negative demand shocks, and to provide campaign funds supporting more egalitarian policies.

Unfortunately in the USA too many of them devolved into obstructionist guilds like in the UK and other countries, and public opinion turned (with the help of the idiots

[Tim Newman]

"The same is true for other forms of labour regulation: health and safety, working time and suchlike. Union bargaining can protect workers more flexibly than “one size fits all” laws. It can distinguish between cases where regulation would be too costly and where it wouldn’t."

Protect, or advance the interests of? In the case of the North Sea, the EU Working Time Directive is ridiculous, as you cannot realistically run an offshore platform on a 38 hour week. The unions have been pushing for the oil companies to be forced to follow the WTD for the sole reason that it would involve a massive pay-hike for their members. It is nothing to do with HSE or worker protection, merely a desire to see their members get more money in their pockets.

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working time and suchlike. Union bargaining can protect workers more flexibly than “one size fits all” laws. It can distinguish between cases where regulation would be too costly and where it wouldn’t."

Protect, or advance the interests of? In the case of the North Sea, the EU Working Time Directive is ridiculous, as you cannot realistically run an offshore platform on a 38 hour week. The unions have been pushing for the oil companies to be forced to follow the WTD for the sole reason that it would involve a massive pay-hike for their members. It is nothing to do with HSE or worker protection, merely a desire