Labour unions

Labour unions are a curious thing. They have an indispensable function in a market economy, but they also tend to fill out a political role, and the latter typically opposes political turns towards dictatorship - even up to nation-wide general strikes.

Labour unions have been weakened in the Western world since the late 1970's due to political and other reasons, though: Both economic development and political opposition by ruling right wing governments have caused this decline. The political alignment of most labour unions with the left wing sets the right wing into an opposing political role, and right wing governments rare have qualms about weakening the labour unions (right wing-aligned ones often excepted) by blunting their tools.
It's historical irony that the governments known for the most union-busting in the Western world during the 1980's hailed the rise of the Solidarność labour union, which opposed the "communist" government of Poland.

Quick jump back to the economic role of a labour union:
It doesn't take much experience or imagination to understand that a single replaceable worker on his own has little to bargain with a multinational corporation with billions of profit. United workers on the other hand can collectively refuse to work under the given conditions and thus shut down the operation of the company and thus hurt its profits, which gives them substantial bargaining power.
Three outcomes are possible: The labour union may still be weaker and not be able to get an agreement on 'fair' wages and work condition, it might be the equal of its counterpart and be able to just get 'fair' wages and work conditions and finally it may be more powerful than its counterpart.

The anti-labour union sentiment is largely about the possibility of the 3rd case and about unnecessarily harmful strike strategies. The latter can be tuned away through legislation - one only needs to do it (which those opposed to labour unions fundamentally prefer not to do in favour of weakening the labour union). A bargaining power asymmetry favouring of the employees is just as wrong as an asymmetry in favour of the employers, so a good government strives for a fair balance. It's difficult to tell what a bargaining power symmetry is, though. The practical way is to at least recognize whether the current is a clear asymmetry or not (and in whose favour an asymmetry is).

The ability of workers to strive for fair instead of lopsided negotiation is a freedom issue, as it is about freedom from exploitation. You wouldn't be free if some guy next door could without good reason take a tenth of your income, for example. The ability of an employer to withhold a tenth of your fair income from you due to superior bargaining power is essentially the same. And the exploitation of powerless workers can go much farther, and did in more dark times. In some places at some times a worker couldn't even leave his job because he would be blacklisted by all other employers in the sector due to an agreement amongst employers. Imagine a master in printing with 20 years job experience being effectively shackled to his job. And there were other techniques of exploitation as well, this fantastic song describes one:

Some systemic problems of labour unions could be addressed by explicitly restricting their activities to economic matters, outlawing political activity. This would be highly questionable and risky even if political activity by counterweights such as employers associations was outlawed as well. That's impossible anyway, for some of their counterparts are private citizens (billionaires etc.).

To get the power balance between employees and employers right goes beyond economics, but it's a big deal in itself. Germany had labour market-related reforms in 2003 and 2004. These followed about a decade of employer association propaganda about competitiveness and did indeed increase the international competitiveness of the German businesses. This is a consensus view, which can also easily be seen in an extraordinary shift of the balance between capital and labour income which happened 2003-2007: The share of labour income in national income fell from 71% in 2003 to 63.6% in 2007 with capital income share going from 29% to 36.4%. The capital owners had their situation improved by a quarter.
Profits have suffered later during the economic crisis (weakened demand for export products), masking the domestic redistribution towards capital owners considerably (labour income temporarily back to 68%).*

The reforms obviously didn't make the market economy go smoother only. It was in great part about redistribution of income from employees to employers, and the mentioned data doesn't even show the gains made by top managers since it treats their income as labour income, not capital owner income.
The increase in competitiveness wasn't necessary at all, despite the employer side propaganda. Germany's trade balance was about balanced. The shift was harmful indeed, as the fixed exchange rate regime with most other European countries known as Euro currency didn't balance trade any more. Germany entered a phase of huge, partially harmful and needless trade surpluses which contributed a lot to the current Economic mess in Europe that may be a long-term security risk.

Meanwhile, German labour unions keep losing member strength. Their bargaining power is largely down, and it's only custom and legislative environment which keep their wrecks afloat as relevant players.
A currently debated (in Germany) exception are specialised labour unions which accept only such employees as members who have a lever role. Personnel working in trains, airline pilots and traffic controllers specifically. These specialised labour unions have proved to be powerful, since strikes of their members have a disproportionate effect. Economic theory indicates that their members should probably be paid very well if they have indeed such an exceptional importance, but people are more used to seeing them a couple levels lower than for example plastic surgeons in income. The classic labour unions which try to represent entire sectors instead of only small shares of a company's employees have opposed their competition as well.
Finally, the general population is not very inclined to suffer from temporary mobility infrastructure blackouts just in order to help a small group get better pay and work conditions (event hough the latter influence the safety onboard). The German government (cabinet and parliament) currently move to cut down the power of such specialised labour unions in favour of the classic ones.
Still, the success of the specialised niche labour unions shows that it is indeed about the (im)balance of power. It's not globalization or whatever supposed change of the world that keeps employees from having a good bargaining position.

I suppose the crisis around labour unions wouldn't be nearly as severe if two things were different:
(1) A more widespread understanding that it's about power (a)symmetry in an important market economy function, not about good and evil
(2) A sincere desire to solve the problem, including a readiness to leave traditional paths.

Here's a model how to get the balance right without the negative economic effects such as strikes in public transportation:

Replace the strikes with a fine system:
The labour unions would be obliged to raise a certain percentage of their members' incomes as membership fees with regulation on how much and when they could or have to pay something back.
When despite all rules no agreement about wages and work conditions in the next period can be found between employers and employees, there would be a labour dispute, but not with strikes. Instead, for every day of non-agreement with either one party insisting on the labour dispute, both would suffer monetarily. The labour unions would lose a percentage of their capital reserves every day to the government, and the employers would lose a percentage of their last three years average turnover or profits (whatever share is greater) to the government.** The government would be obliged to buy back debt obligations with the money.
The labour dispute ends with an agreement or if the labour unions runs out of money, in which case the pre-existing wages and conditions would be extended. Other labour unions would be allowed to help the struggling one with credit.

The percentages mentioned would be set by legislation, and this means the government would have an elegant ability to balance the power of both employers and employees.

Bargaining power may still be lopsided with this kind of regulation, but this could be factored into the future voting decisions of the citizens.

I wrote earlier about mature countries and their relative inability to reform or reallocate resources well. This text picked one example of something going wrong without effective remedy applied, and at the same time it pointed out how we could still find a remedy if only we looked more objectively at the problem and were ready to enact substantial changes. This theme pertains to many problems, including bureaucracy-related ones.


*: Source: Destatis, website of the German federal statistics agency. See chapter 1.3 here.
**:: The percentages could be really small, such as 0.3% of annual profit/labour union reserves per day, to offer them time for reconsidering their stance. The percentage would be adjusted if only a share of the employees are involved in the labour dispute. There's no hurry, after all. Without strikes, the outside world would not be affected unfavourably.

edit 12-2014: Even more details would be needed to make the scheme work in light of companies without turnover, such as R&D subsidiaries. In this case, "budget" or "expenses" could substitute for "turnover".

1 comment:

  1. Thank you for that post! Interesting proposition for a more "seamless" process.