Reflections from Europe | FEBRUARY 12, 2004
The Things Labour Unions Are Up To: (Promoting general prosperity is not one of them)
None of this is wholly false, but none reveals much of the chain that links effects to their causes. The difference unions can make to a society is one of the most complex and emotionally tainted byways in political economy.
At the level of the single firm, organising the employees in a stand-alone union not affiliated to a larger body has effects on wages and non-wage relations. Prior to being organised, employees get the “rate for the job” according to local custom. The ultimate origin of custom lies in acts of individual bargaining that establish the area or band of ready acceptability. To change this, the union must be strong enough to discipline its own members so they will only work at the rate negotiated by it on their collective behalf, as well as to discourage non-members from free-riding on the union's efforts. The bluntest way of achieving this is the closed shop.
Where the closed shop runs into strong opposition in the community because it violates the freedom to work, the union can still achieve its objectives if it can browbeat non-unionised employees into not undercutting it and to support strike action if need be.
For collective bargaining to have a real point, it must achieve wage rates and non-wage conditions more favourable to the employees than the customary rate. It is difficult to verify whether it is really achieving this. Attempts can be made to compare the union rate with rates in non-unionised shops, but for these comparisons to be convincing, all other things must be equal and of course they seldom are. All in all, however, it is reasonable to hold that unions can raise the wages of unionised labour. They also make wage rates more uniform and less flexible. This would tend to make the wage contract less efficient, equating the firm's demand for labour to its (local) supply at a lower level than would be the case under less uniform and more flexible wages.
For Alfred Marshall's discussion of quasi-rents, see Book VI, Chapter VIII in his Principles of Economics, specifically paragraphs 26-36.
Higher average wages reduce the firm's profit, lower its output and raise its prices. How much of each depends on the nature of competition. A special case is conceivable where the firm continues to sell the same output at the same price under perfect competition, but what Alfred Marshall called its quasi-rent gets transferred to its workers. It is this case, in the form of a sub-conscious dream, that inspires much of pro-union sentiment.
Everything becomes more complex and harder to disentangle when labour organisation becomes industry-wide, let alone nation-wide. If wages are pushed up across a whole industry, prices may well follow suit all the way, since there is little or no competition to hold them back. Consequently, profits may be largely maintained. Most or all of the impact falls on the non-unionised sector, which operates under competitive conditions and cannot raise its prices. Therefore its terms of trade will worsen and its profits and employment levels shrink. The pressure will be mitigated and dispersed if capital is mobile and migrates, taking jobs from the unionised to the non-unionised sector, as it did in the United States when it migrated from the Northeast to the Southeast and Southwest, and as it is doing in Europe when it is “exporting jobs” to China, Thailand and India.
Unionisation also shifts the terms of trade in favour of (some) producers at the expense of (all) consumers. This is a common symptom found in all corporatist social organisation, guilds in the Middle Ages, chambers of industry in Fascist Italy and Nazi Germany, and labour unions in Western democracies.
Looking at how matters may evolve over time, it seems that in the short run profits and employment in the economy as a whole may suffer but union wages may increase. Unions, then, will have acted to good purpose from their members' point of view. However, since a far higher proportion of profits than of wages is saved, capital accumulation, productivity and growth should all be reduced. The long-run damping effect on wages should eventually swamp the short-run boost unionisation can give them. Yet like all elected officials, union leaders cannot afford to worry about the long run.
Analysing the manner, purpose and effects of union action in largely economic terms is a good enough approximation to American conditions. American political culture accepts capitalism as the best of possible worlds. It finds it normal to think of wages as the price of labour and of labour as one of the several factors of production. In most of Europe, this is either not understood or, if understood, it is rejected. For several generations, the political classes and the teaching professions have taught the people that labour was not an economic, but a “social” category, deserving of higher consideration and a different treatment from the mere economic.
It is something of a philosophical puzzle to decipher what is meant by the word “social”, though it is used confidently enough to suggest that it has a clear meaning. One key to understanding policy and politics in most European countries is to take it that “social” indicates that the matter in hand imperatively demands a political decision to override any market solution that would otherwise emerge.
It should be no surprise, then, that European labour unions are really political organisations, straddling the economic and the “social, closely allied to left-wing movements, and permanently camping in the “corridors of power” of all governments whether left or right. Their interest is as much to “change society” as to negotiate good wages and conditions their members.
An exception to most of this is Britain, where the Thatcher reforms of the 1980s have transformed the union landscape. “Official“ strikes now require vote by secret ballot, picketing has been curbed, the most glaring legal immunities of the unions have been removed and the rule of law enforced. After the chaotic disruption of the 1970s, Britain has since these commonsense reforms enjoyed unprecedented industrial peace and a clear lead in prosperity over most of Continental Europe where governments of all shades sought to appease and share power with the unions.
Like in most of the industrialised world, union membership in Europe has been declining for decades. But it is not numbers that make for union strength. Union membership as a share of the labour force is over 80 per cent in Scandinavia, in the mid-20s in Britain, Germany, Italy and Spain, and only 8 per cent in France, with virtually zero in the private sector. Yet if you guessed that it is in France that the unions have the tightest armlock on the government, you would not be far wrong.
Of the four largest French unions, the largest is the CGT; it is orthodox Communist. The third and fourth largest are the FO and S.U.D., both of Trotskyist persuasion. Only the second-largest CFDT is moderate. The CGT has a mere 670,000 members. However, they are concentrated in the state-owned railways, the Treasury and the public schools. The CGT can stop all the trains, disrupt tax collection and government payments, and shut the schools. While the latter might not unduly upset the government, the former two fill it with visceral dread.
Led by the CGT, the unions keep on refusing a spate of long overdue reforms of all kinds, condemning them as “neo-liberal”. The government either keeps postponing them, or withdraws them altogether if the unions cry “boo”. Having a comfortable majority in the legislature is no use; it is the unions' consent the government thinks it needs.
Unions are supposed to live on members' dues. In France, they cover perhaps a quarter of the budget of the only union, the CFDT, that is honest enough to publish any accounts. It is common knowledge that the bulk of union expenditure, including the cost of keeping their bureaucracies in the comfort they feel entitled to, comes from the government, some avowed, some disguised in more or less ingenious ways.
The system began in 1968 and kept growing in the fond belief that one could buy the cooperation of the unions by bribing them outright. This has never worked, but the bribes have proved habit-forming and curtailing them would drive the union hierarchies to paroxysms of fury.
Yet union strength depends on their members' obedience, and the members follow the leaders almost entirely because the government treats them as if they were supremely powerful. There is no one to say loud and clear that they are not, that it would suffice to face them down once for all to realize that the Emperor has no clothes.
However, this is not the first nor the last time that governments fail to do what is good for them and their peoples. If failing to do the sensible thing were not their habit, this column would soon be reduced to writing about apple-pie and motherhood.