In this weeks blog, NERI Co-director Dr Tom McDonnell explores some of the key findings from his NERI Long-Read Series 'Collective Bargaining - Trade unions, economic performance and inequality'.
Does collective bargaining matter for economic performance? This crucial issue for policymakers is the topic of discussion in the NERI’s latest long-read (available here).
Collective bargaining has been in the news a lot of late. The Citizens Assembly on Gender Equality has just made a priority recommendation on the establishment of a legal right to collective bargaining for workers in all sectors. In addition, the Department of Enterprise, Trade and Employment has announced a high level working group to review collective bargaining and the Industrial relations landscape in Ireland. Finally, the proposed EU Directive on Minimum Wage Setting in Europe contains a provision aimed at increasing collective bargaining within Member States.
So what can we say about the impacts on workers themselves and on the wider economy? How do unions and bargaining fit into the institutional structure of the labour market? Does collective bargaining effect employment and unemployment? Is there an impact on productivity and do trade unions have a role to play in reducing inequality?
Crucially, there does not appear to be any tension between broad-based trade unions and economic efficiency. Strategic broad-based trade unions have an incentive to pursue policies that strengthen the labour market and keep unemployment low. Low unemployment gives trade unions leverage in wage negotiations.
What about economic growth? It depends on the type of economic growth we want to achieve. The inclusive high-road approach to growth focuses on raising productivity, whereas the low road approach focuses on driving down costs in order to boost competitiveness. In the long-run, living standards will depend on raising productivity.
The low-road approach can be consistent with low average unemployment rates, but, if so, will have been achieved based on lower wages and lower disposable income for workers, along with greater market inequality.
A sectoral collective bargaining approach avoids the low-road trap because it becomes much more difficult for individual employers to pursue a strategy of driving down pay to enhance competitiveness. Trade unions can be an important element of a high-road policy package. Where there is worker voice and a constructive relationship with employers, better working conditions can be exchanged for higher productivity.
For example, the governments of the Nordic countries recognise trade unions and employers as key stakeholders in the management of the economy. Common wages are set for particular types of work. In a competitive globalised market, this will advantage high value-added activities and more productive firms, and will disadvantage low value-added activities. As such, firms and workers have an incentive to take steps to increase productivity, to support occupational retraining and up-skilling, and to support funding for education and research and development (R&D). Over the long run, a high skill and high wage equilibrium took hold in these economies as their comparative advantage gradually shifted over time towards higher value activities.
The labour share of GDP will be higher where trade unions are stronger. Trade unions will increase the labour share because they increase the bargaining power of workers. This will reduce income inequality because labour income is more evenly distributed than capital income. In addition, collective agreements tend to reflect the interests of the median income worker and this leads to greater wage compression and lower income inequality.
Over the long term, more equal societies tend to be more stable and prosperous. By reducing inequality, trade unions can play a vital role in sustaining long-run growth and the stability of the economic system itself.
These issues are all discussed in greater depth in the long-read.