New Economist

What economics tells us about labour law

Harvard labour economist Richard Freeman recently visited Australia, and has written an article complaining about its labour law on VoxEU: From fair-go to rip-off: Australia’s new labour code. Freeman may well be right - but the current conservative government appears doomed at the forthcoming polls, so some roll-back is likely. What really caught my eye, though, was his comment about what economics tells us about labour law:

Whoever gets elected this fall should scrap Workchoices and take the opportunity to develop a truly modern labour code. Economics offers four principles for such a code.

First, the law should encourage efficient bargaining – that is, bargaining that “leaves no money on the table”. Per the Coase theorem, this means clear and simple regulations so that labour and management can bargain for maximum efficiency even as they fight over distribution. A few basic rules regarding the property rights to employment and workplace decisions in place of rules that are hundreds of pages of micro-managed dos and don’t dos.

Second, economics suggests keeping government officials out of the workplace bargaining. Hayek may have been a curmudgeonly conservative terrified by a now obsolete socialist threat, but he was right about lodging decisions with the people who have local information (subject to some concern about externalities). We want workers, unions, and management to have the scope to experiment with alternative contract provisions. We would encourage diversity on the notion that “one shoe does not fit all feet.” If your firm wants to include a clause in a contract that provides a remedy for harsh, unjust, or unreasonable dismissal of workers, you should have the right to do so.

Third, we would strive that the parties covered by the code agree on the rules rather than seek to impose them without major public support. If there is one lesson from human resource management, it is that workers participation in decisions -- their voice at workplaces -- is critical for a healthy and productive workplace. The Workchoices legislation is based on an outmoded control-and-command view of how workplaces operate. It is alien to the world in which firms operate on the basis of partnerships, group incentives, team production, profit-sharing, and employee-share ownership.

Fourth, economics suggests that any labour code build in some insurance for the protection of workers, even though such insurance may cost a bit of economic output. How much insurance to give workers is a matter of political debate and the weighing of alternative costs and benefits. The more leftwing view can be represented by the following statement: “Perhaps modest economic inefficiency is cost worth paying for if it prevents blatantly unfair behaviour by employers”. The rightwing view is: ”Perhaps some unfair behaviour by some employers is cost worth paying if it gets more jobs”. Different analysts can subscribe to either of these statements and remain true to the economics of weighing benefits and costs.

Three of his four points sound to me like a description of the British industrial relations system. We only fall down on the third - employee voice. Yet do economies like Germany, with Works Councils rampant, really have a better performing labour market?

The anglo-saxon union blues

Recent months have seen further evidence of union decline in the anglo-saxon countries. Rates of union membership have fallen further in 2006, as trade union recruitment efforts fails to keep pace with a growing workforce.

In Canada, union membership levels increased by 62,000 in 2006, while union density fell from 30.0% in 2005 to 29.7% in 2006. "Those in the public sector ...were four times as likely as their private-sector counterparts to belong to a union (71.0% versus 17.5%)", writes StatsCanada.

In the United States, the BLS reported in January that 12.0% percent of US employed wage and salary workers were union members in 2006, down from 12.5% a year earlier. "The union membership rate for government workers (36.2 percent) was substantially higher than for private industry workers (7.4 percent)." Less than one in twelve private sector workers are in a union!

The latest Australian union membership data, released earlier this month, reported that the proportion of employees who were trade union members slumped from 22.4% in August 2005 to 20.3% in August 2006. By my calculations (see Excel time series), this was the largest percentage point decline since 1999.

Yesterday saw a similar trend reported in the United Kingdom. According to the latest annual statistical report:

The rate of union membership (union density) for employees in the UK fell by 0.6 percentage points to 28.4 per cent in 2006, down from 29.0 per cent in 2005. This was the largest annual percentage point decline since 1998.

UK public sector union density (58.8) was again much higher than private sector (16.6%). Roland Gribben reports the numbers in today's Telegraph. His piece included this rather upbeat interpretation from British unions:

...but the TUC said the figures in a Trade and Industry Department publication represented a "success story" because membership had almost stabilised since the Thatcher years.

Margaret Thatcher left office in 1990, when union density amongst British employees was 37.8% It is now 28.1%, a decline of one-quarter. That's a rather sanguine interpretation of 'stability'.

Note: Government statistical estimates on union membership are not available from Statistics New Zealand, although the Industrial Relations Centre at Victoria University do publish annual estimates.

If you can't grow, amalgamate

Mergers have often appealed in declining industries, not least the trade union movement. Australian unions went through a merger frenzy in the 1980s. It didn't arrest union decline. The Germans, too have tried their luck. And in recent years so too have British unions.

Today saw the announcement that the already big Transport and General Workers' Union will combine with Amicus to form a 2 million strong union.

One can see the advantages - economies of scale, finnacial and political muscle, less duplication. But the track record of union amalgamations is not so positive, and the risk of a bureaucratic, remote oligarchy real. Has no one over at Transport House heard of the iron law of oligarchy? As for the Labour Party and the TUC, I doubt either will be pleased. Andrew Taylor writes at FT.com: ‘Super union’ merger wins backing

Amicus and T&G, which between them command about a third of trade union votes, contribute more than £3.5m in a non-election year to the party. This financial muscle is likely to take on even greater significance as donations to Labour have fallen sharply in the wake of the “cash for honours” controversy.

Smaller unions have also expressed unease that the TUC, the trade union umbrella body, could become marginalised due the dominant power of the new union.

I wish the New Union luck, but remain to be convinced.

Britain confronts globalisation

Three recent stories on British reactions to globalisation. First, Sunday's Observer told us on its front page of the birth of the first global super-union. This turned out to be an exaggeration: in fact, four British, American and German unions have agreed to oppose job relocation:

Amicus, the UK's largest private sector union, has signed agreements with the German engineering union IG-Metall and two of the largest labour organisations in the US, the United Steelworkers and the International Association of Machinists, to prevent companies playing off their workforces in different countries against each other.

The move, to be announced this week, is seen by union leaders as the first step towards creating a single union that can present a united front to multinational companies. Derek Simpson, general secretary of Amicus, said: 'Our aim is to create a powerful single union that can transcend borders to challenge the global forces of capital. I envisage a functioning, if loosely federal, multinational organisation within the next decade.'

Second, Edmund Conway reports in today's Telegraph that 70pc of public IT jobs 'could go abroad':

As many as 70pc of public sector IT jobs could potentially be moved abroad to cheaper economies, such as India or China, according to the UK head of the Government's biggest IT contractor.

Bill Thomas, the head of EDS's European, African and Middle East units, said he expected a dramatic change in public sector IT personnel as former civil servants employed by private sector groups faced the prospect of losing their jobs to so-called offshoring.

...Mr Thomas said 60pc to 70pc of the 8,000 EDS employees working on Government contracts – which include major projects for the Ministry of Defence and the Department for Work and Pensions – did not need to be employed in Britain.

"This is a really big, challenging issue for the UK economy," he said.

Third, the Telegraph reports that "fewer than one in four bosses support the immediate granting of  full employment rights for migrant workers from Bulgaria or Romania". The Institute of Directors said that 63 per cent of its members wanted the Government to set quotas. An unusual position for an employer organisation, and evidence of just how far the migration backlash has spread in Britain.

 

France: Unions, jobs and outsourcing

This week I will be citing a few recent papers on outsourcing. The first, by senior INSEE researcher Francis Kramarz, examines the French experience. The paper shows that French unions who flex their muscles in the face of greater trade competition make things worse, by encouraging firms to oursource more jobs. Here is the abstract for Outsourcing, Unions, and Wages: Evidence from data matching imports, firms, and workers (PDF), delivered at the University of Nottingham's recent conference on The Impact of International Competition on Firms and Workers:

How are wages and employment of manufacturing workers affected by trade competition? In particular, how are wages and employment affected by the sourcing strategies of their employing firm and those of their competitors? What is the role of unions in this process? I attempt to answer these questions using unique French data that matches firm-level information on imports, value-added, employment, firm-level data on unions and negotiations, with individual worker data; at a unique moment - the first years of implementation of the Single Market Program (SMP) within the European Community.

A simple bargaining model, particularly well-suited to the French institutional setup, allows me to capture the mechanisms by which changes in competition can directly affect wages: changes in the firm's ability to pay (as measured by the quasi-rent, the total pie shared between the workers and the firm) as well as changes in trade competition and sourcing strategies that potentially affect the bargaining process by altering both the firm's and the workers' threat points. I use an IV strategy where export prices of American firms act as instruments for trade competition and outsourcing. First, trade competition affected the size of the quasi-rents, most particularly in large firms where these rents were large. Because workers received in average 20% of the quasi-rent but also because wages declined with competitive pressure induced outsourcing, trade competition has negatively impacted wages.

To see how unions potentially entered the process, I re- examine my results when information on firm-level negotiations between firms and unions is added. As expected, in firms with strong unions (those able to impose bargaining on both employment and wages) workers were able to capture a large share of the declining quasi-rent (about 50%). However, the presence of strong unions has apparently led these, mostly large, firms to increase outsourcing with an associated decline in employment. As a result, unions' fight for workers' wages and employment appears to have backfired.

Grease and sand: How wages change

One of my first posts on this blog was about the International Wage Flexibility Project. The project uses microdata to study how the complex institutions involved in wage setting affect wage changes, and in particular the three market imperfections that cause the rate of inflation to affect labour market efficiency. These are downward nominal wage rigidity ('grease' effects), downward real wage rigidity, and so-called 'sand' effects of higher inflation creating greater uncertainty about the future path of wages and prices (which can lead to errors and adjustment lags in wage setting). Of these, only downward nominal wage rigidity has been extensively studied before.

The project now encompasses 31 different panel data sets from sixteen European countries and the United States - a considerable achievement. I understand a book is in the works, but in the meantime two papers have recently become available. The first is a National Bank of Belgium working paper, by William T. Dickens, et al: How wages change: micro evidence from the International Wage Flexibility Project

We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.

The second, longer piece is an article submitted to the Journal of Economic Perspectives, again by William T. Dickens, et al: The Interaction of Labor Markets and Inflation: Analysis of Micro Data from the International Wage Flexibility Project (PDF). The paper finds large differences across countries in the extent of nominal and real wage rigidities:

We find considerable variation in wage changes among workers in the same country and year. The variation increases with inflation, as we would expect if either downward nominal rigidity or sand effects were important.

Applying a new estimator for the prevalence of these three effects, we also find evidence of both types of rigidity in nearly every country. Estimates of the fraction of workers potentially affected by downward nominal wage rigidity range from 9% to 66%, while the comparable range for real rigidity is 3% to 52%. Furthermore, there is some evidence that countries with higher nominal rigidity tend to show less real rigidity.

The authors also find that increasing union density is associated with increasing real wage rigidity:

...Our examination of the causes of downward nominal and real wage rigidity suggests an important role for the extent of unionization and collective bargaining coverage. Both show a consistently positive relationship with the extent of downward real wage rigidity and a negative association with downward nominal wage rigidity. This finding suggests that collective bargaining focuses workers’ attention on real wages and gives them some ability to resist real wage cuts.

...These differences in rigidity across countries may translate into differences in unemployment. Measures of the “wage impact” of downward nominal and real wage rigidity (that is, the extent to which workers’ wages are affected in a particular year) are positively related to unemployment with statistically significant coefficients of about the size predicted by theory.

Impressive work. The job of coordinating thirteen country teams plus a central analysis team, devising a common protocol, and analysing the results jointly cannot have been easy.

China to crack down on sweatshops

China is to toughen up its labour laws, according to today's New York Times - and multinationals are none too pleased. David Barboza reports China Drafts Law to Empower Unions and End Labor Abuse

SHANGHAI, Oct. 12 — China is planning to adopt a new law that seeks to crack down on sweatshops and protect workers’ rights by giving labor unions real power for the first time since it introduced market forces in the 1980’s.

The move, which underscores the government’s growing concern about the widening income gap and threats of social unrest, is setting off a battle with American and other foreign corporations that have lobbied against it by hinting that they may build fewer factories here.

The proposed rules are being considered after the Chinese Communist Party endorsed a new doctrine that will put greater emphasis on tackling the severe side effects of the country’s remarkable growth.

Whether the foreign corporations will follow through on their warnings is unclear because of the many advantages of being in China — even with restrictions and higher costs that may stem from the new law. It could go into effect as early as next May.

It would apply to all companies in China, but its emphasis is on foreign-owned companies and the suppliers to those companies. The conflict with the foreign corporations is significant partly because it comes at a time when labor, energy and land costs are rising in this country, all indications that doing business in China is likely to get much more expensive in the coming years.

But it is not clear how effectively such a new labor law would be carried out through this vast land because local officials have tended to ignore directives from the central government or seek ways around them.

China’s economy has become one of the most robust in the world since the emphasis on free markets in the 80’s encouraged millions of young workers to labor for low wages at companies that made cheap exports. As a result, foreign investment has poured into China.

Some of the world’s big companies have expressed concern that the new rules would revive some aspects of socialism and borrow too heavily from labor laws in union-friendly countries like France and Germany.

Signs of creeping social democracy perhaps? Oh, the horror! Barboza continues:

'Migrants welcome here'

It is rare these days for Tony Blair and Britain's trade unions to agree, but today saw one such occasion. The topic? Migrant workers. Brendan Barber, general secretary of the Trades Union Congress, writes in today's Guardian that we should Stop blaming migrants. Barber called for solidarity, not scapegoating:

It has always been tempting to scapegoat "the other" when such economic difficulties come round. But undercutting, exploitation and unemployment are not caused by eastern Europeans, nor are these things a necessary part of a sustainable economic future. And the solution to the growing vulnerability of large sections of people at work that they represent is not to throw up the shutters and put out the "foreigners not wanted here" signs, even if we could.

The truth is that the government can do little in practice to restrict Bulgarians and Romanians. They will have a right both to travel here and to be self-employed after accession. EU member states can temporarily restrict employment but, as Germany shows, all that happens is that you replace employees with the self-employed. And their wage levels are likely to be even lower than the super-exploited Polish agency workers who are the stuff of rightwing tabloid scare stories. That is why the TUC conference in Brighton this week will hang up a "you are welcome here" sign.

...We live in an increasingly globalised world. Our best response is not to yield to little England, but recognise that the best way of avoiding a rush to the bottom is to fully embrace Europe; and that means accepting the free movement of labour as well as capital and goods.

Mr Blair, in his speech to the TUC Congress, echoed those remarks:

I applaud your TUC statement on this issue. It is so close to my own view that I thought of simply reading it out and letting it stand as my speech. That may be both the first and the last time I can say that of a motion to the TUC.

As you say: "If migrant workers are treated fairly and paid a decent wage, they represent no threat to the livelihoods of people who are already living and working in the UK, and... it is good for the people of Eastern Europe because it provides them with growth, better jobs and wages, and spreads and deepens European democratic values.

"Creating a common market means that workers must have rights as well as businesses, and there must be freedom of movement for workers as well as for capital, goods and services."

I couldn't agree more.

The Debate Over Inequality

by Mark Thoma

Well, me versus Samwick, Mankiw, and DeLong seems like a difficult match to win, but I am going to persist anyway. Stay the course so to speak (see also the Paul Krugman column that is at issue, an earlier post by Andrew Samwick, my response to Andrew, and a follow-up at Angry Bear). Each is objecting to Paul Krugman's claim that government policies can change income inequality and that changes in political ideology can explain, in part, variations in income inequality over time.

I hope to have more to say later, but for now let me offer a bit of evidence from Australia through Andrew Leigh, and add a bit more on the US as well. First, here's Andrew Leigh:

Top Floor, Going Up, by Andrew Leigh: An updated version of my research with Tony Atkinson on top incomes is written up by John Garnaut in the SMH today. There’s not much there to surprise regular readers of tbis blog. But since it’s not every day that I crack the front page of the SMH, I thought I’d indulge in some shameless self-promotion.

Here's the abstract from the article (PDF). It's also written up in the Sydney Morning Herald, as noted by Andrew:

ABSTRACT Using taxation statistics, we estimate the income share held by top income groups in Australia over the period 1921-2002. We find that the income share of the richest fell from the 1920s until the mid-1940s, rose briefly in the post-war decade, and then declined until the early-1980s. During the 1980s and 1990s, top income shares rose rapidly. At the start of the twenty-first century, the income share of the richest was higher than it had been at any point in the previous fifty years. Among top income groups, recent decades have also seen a rise in the share of top income accruing to the super-rich. Trends in top income shares are similar to those observed among other elite groups, such as judges, politicians, top bureaucrats and CEOs. We speculate that changes in top income shares may have been affected by top marginal tax rates, skill-biased technological change, social norms about inequality, and the internationalisation of the market for English-speaking CEOs.

Factors like top marginal income tax rates and social norms are connected to the political environment, but of course, this is in no way conclusive. A lot of the change is driven, according to their results, by the incomes of CEOs. But I think it's at least suggestive that the political environment drove some of the change.

For the US, as passed along to me in an email, factors such as the New Deal's very large tax increases on the wealthy, both directly on income and indirectly on corporate profits are an important factor connected to the political environment at the time. It's an open question how much of the change in inequality that might explain by itself.

Unions are also worth taking seriously with union membership nearly tripling to about a third of the workforce from the mid 1930s to the mid 1940s. This would affect all wages, not just those in sectors where unions are prevalent. The decline of unionization after the 70s is also a factor to consider, and there's a strong case to be made that this was made possible by a political environment that allowed union busting to occur. In any case, I don't think this is a settled question and I hope to follow up with more later. [dual posted]

Update: Please see Brad DeLong's excellent summary and follow-up on this debate.

Inequality? What inequality?

I'm not sure that many US readers will believe them, but a new working paper argues that there was hardly any change in inequality across OECD countries during the 1990s. Or, as they put it: "no clear general trend appears for total disposable income inequality and relative poverty among the total population". So the improvement in labour market performance experienced by many OECD countries over the past decade has not been at the expense of widening inequality (at least up until the year 2000, anyway, and not for total disposable income).

The paper, Labour market performance, income inequality and poverty in OECD countries, was written by Jean-Marc Burniaux, Flavio Padrini and Nicola Brandt at the OECD. It has used a wide array of microdata and what appears to be quite robust analysis to arrive at the following main findings:

Both inequality at the level of disposable income and the relative poverty rate have remained broadly constant since the mid-1990s on average in the OECD countries for which data are available, after rising during the previous decade.

During this period, reductions of unemployment have been associated with rising wage dispersion for workers. Nevertheless, no clear general trend appears for total disposable income inequality and relative poverty among the total population. These developments suggest that gains from higher employment have in general offset the impact of rising wage dispersion. Indeed, simple correlations indicate a significant statistical association between improved labour market performance - especially of females - and lower inequality and poverty.

...the analysis fails to detect a role for the unemployment benefit system in affecting inequality/poverty and, in general, any robust relationship between labour market institutions/policies and inequality as measured by the Gini coefficient, which gives more weight to middle parts of the income distribution. Whether this indicates that institutions/policies have a limited effect on the overall income distribution or it is the result of insufficient data availability on both inequality and policies is an issue deserving further examination in future analysis.

Though unemployment benefits don't seem to make much difference, unions and taxes do:

A preliminary econometric analysis suggests that a stronger bargaining power of trade unions is associated with lower relative poverty and income inequality when this is measured by an indicator giving more weight to the tails of the income distribution (the 9th-to-1st decile ratio). This result could possibly be explained by the unions' role in compressing the wage distribution and in limiting the extent of the working poor. Moreover, a negative relationship emerges between the tax wedge and relative poverty, probably because the corresponding tax revenues are used to finance social programmes.

Please note that there are also annexes (PDF) describing the dataset and containing additional analysis, tables and figures. All up, 90 pages of quite intriguing analysis. It's a pity, though, that the authors didn't also turn their spotlight onto market incomes (wages).