Reflections from Europe | FEBRUARY 4, 2013
One Size Fits All, But Not Well: Collective Bargaining Conceals and May Waste a Rich Source of Productivity
In or near the origin in these and many other institutions, the state naively but sincerely believes that it is acting in the public interest while also serving its own, narrower one. The public itself is educated to believe that the common good is being served, while the whole circus is marching down the road that is paved with good intentions.
This article seeks to look at one of the prominent state-sponsored institutions, namely collective bargaining, as a tool for shaping the common good and protecting the weak but which too often is also an arm that keeps shooting us in the foot. Its 19th century beginnings were respectable grass-roots ones. The only buyer in a mill town was the mill; as the sole bargaining agent on its own behalf, it was felt to have an undue advantage over the hundreds of workers trying separately to sell their labour to it. There was competition for jobs but no competition for men to fill them; commuting for work at the neighbouring town was not a practical proposition. The early unions set a sole bargaining agent to sell labour opposite the mill, the sole agent bargaining to buy it.
Read more about unions in Labor Unions by Morgan O. Reynolds in the Concise Encyclopedia of Economics and in Anthony de Jasay's article "The Things Labour Unions Are Up To: (Promoting general prosperity is not one of them)", Econlib, February 12, 2004.
Unions, however, had the structural defect of leaving open a strong incentive for free riding. A worker could benefit from collective bargaining even if he did not pay union dues and did not obey a strike call. About the same time that their built-in vulnerability became only too evident in the midst of bitter industrial disputes, the political wind started to shift in the unions' favour. Suffrage was becoming more nearly universal and governments felt the need to win over some of the emerging working class vote. Support for the closed shop, the collection of union dues through deductions from the wage packet, aggressive picketing, and the protection of unions from liability in damage actions, were the policy innovations to strengthen the union side in collective bargaining. Ever since, pro-union policies have remained basic ingredients of what English English calls Labour or Social Democrat and American English calls, of all things, "liberal" politics. Unions spread and tended to become industry-wide and nation-wide organisations. Thus today in most industrialised countries there is a union tariff and set labour conditions for each industry where half or more of all wage-earners wear "one size fits all" suits.
This is a gross anomaly, for it cannot seriously be supposed that every worker earning the same union tariff has anywhere near the same productivity. Some people have several times more potential productivity than others, and some respond to incentives by translating more of their potential productivity to actual work performance than others. Potential productivity that depends on physical and mental endowments, experience, and good will, gets translated into actual productivity depending on wages, climate in the work place, consideration for the person, and no doubt many other variables. If the union tariff is the same for all much of the potential productivity will simply not be deployed. The efficient wage that allows no productivity to go to waste is one where the marginal wage cost equals the marginal product of the employee. Both paying a lower and a higher wage would make the employer worse off and also waste resources. However, such a perfect wage structure could only be achieved if every person's wage and benefits were tailor-made to take account of his potential productivity and its responsiveness to incentives. For workplaces employing hundreds of workers, this is a hardly attainable objective. The personnel manager and the foremen would have to have superhuman flair, as well as great tact to disarm jealousies.
Nevertheless, half a loaf is better than no bread. Every person's earnings cannot be separately negotiated and got right as a tailor-made suit after three fittings, but it is possible to do better than one-size-fits-all.
After the reunification of East with West Germany, unemployment became a serious problem, the more so as much of it seemed to be structural. Chancellor Gerhard Schroeder then performed the truly heroic kamikaze act that no other democratic politician has had the stomach to carry out: he sacrificed his chances of re-election and with barely three years of his term to go, in 2002 and 2003 he embarked on labour market reforms that made his defeat in 2005 a certainty. Advised by Peter Hartz, the personnel director of Volkswagen, he pushed through deeply unpopular "anti-labour" measures that started massively to bear fruit a few years or so later. The table below shows how German unemployment, initially much worse than the French, suddenly dropped until, as of 2012, the German rate as a proportion of the active population was only half that of the French.
|Unemployment Rates (source Eurostat)|
What the figures do not show is part of the background story. Especially the blow dealt to collective bargaining. Not all the fall in German unemployment was due to the Schroeder-Hartz reforms. Part of it was due to management and workers, mostly in plants, shops and offices with less than 1,000 employees, who "conspired" against the state-wide labour union and the pay and conditions the union had collectively bargained. Owners, managers, and workers quietly agreed that pay needed to come down and hours needed to get longer, but above all both had to become much more flexible and easy to adapt to ups and downs in the work load, the price concessions that had to be made to gain a contract or keep the business of a particular customer, and also redundancies if putting people on part-time did not suffice. Much of this was in flagrant violation of union rules and union tariffs. The unions preferred to look the other way for fear of being openly disobeyed and losing face. The upshot was that the uniform one-size-fits-all pattern that tends to result from state encouraged collective bargaining, has broken down and was replaced by hundreds of smaller bargaining units. This pattern permitted a wide variety of pay bargains, easily changing pay and other conditions and differentials tailored to small groups or even individuals.
It would be foolish to argue that the current outstanding German economic performance, regarded with awe and hardly concealed ill will by several of the less brilliant eurozone countries, is primarily due to a weakening of the oppressive ineptness of nationwide collective bargaining. Yet it must do a deal of good not to wear one-size uniforms all the time and being shot in the foot only once in a while.