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Workingyforytheyeconomy Workingyforytheyeconomy The economic case for trade unions Looking at the relationship between two major economic trends since the 1970s – declining union membership and a shrinking share of wages and salaries in national income – it becomes clear that the UK has paid a heavy economic price for years of labour market deregulation and anti-union policies. yy Over the last four decades, the decline As shown in the graph, wage share in the UK of trade unions and weakened collective reached its peak in 1975 at 76.2% and had voice of the UK workforce have slowed the decreased by 8.9% in 2014, to 67.3%. motor of the economy - reducing national income by £27.2bn1. This can be explained Figure 1: Decline in the wage shareacross Europe in seven steps: 76 1. Ayloweryshareyofynationalyincomeyy hasybeenygoingytoywages 71 There has been a significant shift in the distribution of the national incomes of developed economies since the 1970s. National income is 66 the total amount produced by an economy in a single year, and is usually measured by Gross Domestic Product (GDP). 61 Regardless of their individual histories and institutions, European countries have seen a Wages as a share of national income (%) 56 pronounced decline in the share of national 1960 1970 1980 1990 2000 2010 income received by labour – the wage share – Key and an increase in the share going to capital in Denmark Sweden United Kingdom the form of profits for private business owners, France Germany EU15 shareholders and financial investors – the Source: AMECO. Retrieved from http://ec.europa.eu/economy_finance/ profit share. db_indicators/ameco/index_en.htm Note: ‘EU15’ shows an average of wage share decline in 15 European Union member states.2 2 Trade unions: working for the economy 2.yTheyreducedyabilityyofytheyworkforceytoy Figure 2: Fewer people in unions negotiateycollectivelyyonywageylevelsyisyay majorycauseyofythisydecline 90 Trade unions are the collective voice of the 80 UK labour force. They play a critical role in 70 determining what portion of national income goes to wages. This bargaining takes place 60 mostly at the level of individual workplaces, 50 where trade unions bring together the voices of employees to negotiate on wages and 40 conditions. Union density (%) 30 The aggregate effect of these individual 20 negotiations, only some of which are coordinated 10 across different workplaces in a sector, is a measurable impact on the share of national 0 income going to wages overall. 1960 1970 1980 1990 2000 2010 Key Over the past three decades there has been a Denmark Sweden United Kingdom pronounced decline in membership of unions, in France Germany the level of industrial action and in the share of Source: OECD. Retrieved from https://stats.oecd.org/Index. the workforce covered by collective bargaining. aspx?DataSetCode=UN_DEN Note: Union density is calculated as union It is the decline in density – the percentage of membership as a proportion of wage and salary earners in employment. the workforce which is in a union – that gives the most accurate picture of the reduced powers of Figure 3: Decline in collective bargaining unions in many countries in Europe, but most 100 dramatically in the UK. 90 As shown in Figure 2, the UK has experienced one of the sharpest declines in union density in 80 Europe, behind only three countries – Portugal, 70 Ireland and Austria.3 60 Union density in the UK fell from a high of 49.9% in 1981 to a record low of 25.4% in 2013. This 50 decrease – union density has halved in 30 years 40 – significantly exceeds the rate of decline in Bargaining coverage (%) Germany (18.3%) and France (14.4%).4 30 While membership levels measure the potential 20 bargaining strength of unions, a fuller picture of 1960 1970 1980 1990 2000 2010 their effectiveness and reach can be seen by Key looking at bargaining coverage – the level of the Germany France United Kingdom national workforce which is covered by collective Denmark Sweden agreements on pay and conditions.5 Source: Visser, J. (2013), ICTWSS. Database on institutional characteristics of trade unions, wage setting, state intervention and social pacts. Retrieved As Figure 3 shows, following the decline in from http://www.uva-aias.net/208 membership, bargaining coverage in the UK has plummeted, from a peak of 80% in 1979 to 31.2% in 2011. Today, the vast majority of the British workforce has no say over their pay and conditions. 3 Trade unions: working for the economy 3.yWhyytheyreachyandyinfluenceyofyy yy Changes to incentive regimes have seen pay unionsyhasydeclined being increasingly linked to performance, reducing commonality among workers. Several factors have contributed to the falling When wages and terms of employment are rate of union membership and reach in the UK. negotiated collectively, this takes place at The government-led reforms of the 1980s and the level of individual workplaces rather than 1990s introduced onerous regulations for union across sectors or nationally. activities and new laws were created imposing limits on employee protections.6 4.yEconomicygrowthyhasyslowedybutytheyy shareyofynationalyincomeygoingytoytheyy The labour market and workplace have also profitsyofyfirmsyhasyrisen changed in ways that mean employees are now less able to speak collectively, weakening the The decline in the wage share and increase in labour force’s negotiating position on wages and the profit share has happened at the same time conditions, even when collective bargaining and as a weaker growth performance over the last union activities take place. three decades in the UK and other European countries, the US, Japan, and several major These changes include: developing countries.8 yy Deregulation of the labour market carried out In the UK the seemingly higher growth rates of between the 1970s and 1990s – including 2000–07 appear, with hindsight, as something of changes to unemployment insurance benefits, an illusion: in the absence of strong productivity- employment protection policies and payroll oriented wage increases, it was rising household taxes. This reduced the bargaining power of debt that fuelled consumption.9 This proved to the work force significantly by increasing the be a fragile growth model that collapsed in the threat of dismissal.7 Great Recession. Average annual growth in the 2000s (2000–13) in the UK, including the years yy Cuts to welfare, high unemployment levels, of the recession, is considerably lower at 1.7%. and austerity measures reduce the options available to employees, meaning that people Company profits are accounting for an are more likely to take on jobs with poor pay increasingly large slice of the UK economic pie, and conditions. but the pie itself is growing more slowly. Why? yy Many jobs, particularly those associated with This general drop in growth levels poses a the rise of the service industry, have become significant puzzle for proponents of economic increasingly characterised by multi-skilling, policies that are intended to ensure profitability, flexible and casual employment contracts, and such as labour market deregulation, but that self-employed work. Individuals in this growing have failed to restore economic activity to portion of the labour force find themselves previous levels. more isolated and the transient nature of their positions provides less opportunity to Mainstream economic policy in recent years has coordinate with colleagues. been based on the belief that if wages are kept low relative to company returns, investment by yy The growing prominence of globalised firms firms, encouraged by greater profits, will pick has transformed the negotiation process; up. In addition, if labour costs are falling, exports firms increasingly coordinate their activities will become more competitive, stimulating more in complex and dispersed ways involving overseas sales. outsourcing and relocation. 4 Trade unions: working for the economy But it is evident that enacting economic policies Employees have a higher propensity to spend on the basis of these assumptions – for example than those who own the companies which limiting wages, curtailing trade union activities pay their wages and, therefore, less spending and reducing collective bargaining coverage happens in the economy if the wage share – has not had the desired effect of boosting is squeezed.10 national income. If spending power is reduced, firms, facing 5.yWagesyplayyayvitalyroleyinytheyeconomyyandy smaller markets, will choose to hold back on ifytheyyareyrestricted,yspendingycanyslow investment and production. Growth overall is then likely to fall, unless the spending squeeze In the economic theory and related policies is outweighed by increased activity elsewhere outlined above, which focus on the supply side in the economy, such as through increasing of economic relations, wages are treated first and income from net exports. foremost as costs to a business. As such, wages must be moderated to ensure the share of Measuring the interplay of these factors over income going to company profits remains high. time determines whether the economy of any particular country is driven more by wages, But there is another side to this coin: the or by profits. demand side. As shown in figure 4, wages are not merely a cost detracting from company 6.yTheyUKyisywage-ledy–ywhatythisymeansyy profits, but the source of demand in the andywhyyitymatters economy through spending, and as such play an essential role in generating company revenues. Findings show that, alongside Germany, France They are the means by which consumers buy and Italy, the UK economy is in fact wage-led.11 products and therefore drive the economy. This means that it is wages, not profits, that drive growth in the economy. Figure 4: The circular flow of income in Contrary to assumptions that have led to a the economy policy-driven reduction in the wage share, growth in the UK is driven by healthy wages – more so ome (mon Inc ey) than by increasing company profits. Labour In fact, if profit share goes up, as has been the case for the past four decades, demand actually decreases.
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