Economic Nonsense: 48. Labour Unions are essential to improve wages and conditions for workers

It is actually improved productivity, not labour unions, that has improved the rewards of labour.  People earned less money in former times because productivity was low.  People were paid according to the worth of their input into the production process.  When each worker contributed little, they were low paid.  As technology and production methods improved, so did the worth of each worker’s input, and wages increased accordingly.

Employers compete for labour to produce goods and services and to make profits.  They have to pay wages that attract enough workers, and compete with other employers to do so.  It is true that unions can use coercive methods to impose higher costs on employers, but this limits total employment in those sectors, and thus opportunities for employment to non-unionized labour.  The US auto industry features somewhat higher wages in unionized car plants, but there are far fewer of them than there are non-union plants.

Although it is improved productivity that brings higher wages, the effect of unions is often to lower productivity through restrictive work agreements that spread work out among more employees.  More employees equals more members paying union dues.

In post war Britain, one group that received among the highest reward increases was the completely non-unionized sector of people who clean homes – the ones who used to be called char-ladies.  The demand for their services from businessmen and women who did not have the time to do it themselves, coupled with declining numbers available to do it, led to huge pay increases.

The fundamental truth is that unions do not increase pay for workers generally.  They can increase pay for their own members, but at the expense of non-members rather than at the expense of employers.  Declining union membership in both the UK and the US has been the result in changes in the type of work being done.  Mass manufacturing has become more automated, meaning higher wages for fewer workers, leaving others to seek non-unionized work elsewhere.  Some goods once produced domestically are now bought more cheaply from countries with non-unionized workforces.  The result is fewer union jobs.  In the UK unionization has increasingly become a feature of public sector workers rather than private industry.

Maybe Keynes was right after all?

It has to be said that we’re not great fans of macroeconomics around here. Not enough good data from enough different places to definitively answer most questions: and that’s before we get onto Hayek’s point about simply not being able to calculate the economy without using the economy itself to do so. However, this makes us think that Keynes might well have been right on one point:

It took far too long but Britain’s traumatic national pay cut is coming to an end. Even on the somewhat crude median earnings measure, pay is finally going up again, even after accounting for the effects of price rises. Wages are rising a little faster and inflation has collapsed, a golden combination for employees across the country.

Ever since the Industrial Revolution and the spread of capitalism, gradually rising wages have been the norm, apart from in wartime and during brief periods of extreme economic dislocation. The fact that this process went into partial reverse over the past few years despite the recovery came as a shock and helped to explain why so many people began to fall out of love with capitalism. It is therefore excellent news that normality is finally re-establishing itself.

One view of unemployment is simply that it happens when labour is more expensive than people are willing to pay for it. That’s obvious in that one sense of course. The question becomes then well, how quickly will the repricing happen if we do ever get to that stage? There are those who insist that it happens immediately and thus unemployment and recessions cannot happen. Not an entirely convincing view. There are also those who insist that it can take forever and this justifies all sorts of interventions. And then we’ve got the evidence of the past few years.

It could be argued that labour in the UK did become too expensive. We had just had the largest and longest peacetime expansion of the economy after all. So, a repricing was necessary. And this is where Keynes could be said to be correct. It takes time because nominal wages are sticky downwards. People really, really, don’t like lower numbers on their paycheques. They’ll grumble about their real wages falling if it’s disguised with a little bit of inflation but they’ll riot if the equivalent fall were at a steady price level.

We don’t say that the past few years prove it: only that what evidence we have is consistent with this explanation. And, given the paucity of our evidence base, that’s probably the best we can do.

Pay is determined by your best alternative job

Economic theory tells us that we really ought to be paid our marginal productivity. And no one at all believes that that actually happens in detail. However, we can take a step back to a point which even Karl Marx got, which is that your pay will reflect the demand for labour. More specifically, the better the alternatives you have the more your pay is going to go up. And here’s a nice little story from the Frozen North to illustrate that:

There’s been a lot of attention paid to how Canada’s oil boom has helped make gasoline cheaper. What many people may not realize is that the boom is also driving up the prices they pay for burgers and steaks.

Surging energy investment in Prairie Provinces, home to most of the nation’s farms and cattle ranches, has boosted domestic crude output to a record and sent pump prices to a three-year low. That’s led to jobs on drilling rigs or pipe crews paying two-thirds more than those in livestock, luring cowboys and beef-plant workers to the oil patch.

By cowboy there they really mean more what we English might call a cowman, rather than some Bill Cody type. But it’s obvious what is happening. There’s no more to do out on the prairie than just oversee the creation of cowpats and that’s driving up the wages of those who are there. It’s the very same process that leads to a hairdresser making very much more money in the UK than one in China does: the pay of hairdressers is not determined directly by the productivity with comb and scissors, rather by the pay on offer in the next alternative job.

This doesn’t mean that the economic theory is wrong though: only that it operates in a rather clunky manner and so is something that gets tended towards rather than an equilibrium state at which we all always exist. As higher productivity jobs appear then they will tempt away some of the labour force. And so all wages tend towards the productivity of the work being done.

At which point we might have a little snark about the UK. There’s a lot of complaining going on that the jobs being created these days aren’t very well paid, something which is true. But it’s also true that the highest productivity jobs in the UK have for some decades been those in wholesale finance in The City. Which is exactly the sector that those same complainants are determined should shrink.

Just like oil wells push up wages for cowboys, so does shutting down highly paid jobs in banking reduce other wages in the same economy.

As we’ve said before there’s something a little odd about UK inequality

We’re often told that the UK is one of the most unequal countries in Europe. We’re also often told that this is bad, very bad, and something must be done. We’ve pointed out a number of times that there’s another difference in the UK economy, something that makes us rather different from other European economies. And that’s the massive importance of London in our economy. In the latest release of figures from the ONS we can see this quite clearly too:

The UK’s highest earners live in Wandsworth, Westminster, and Richmond upon Thames – all in London.

The weekly wage of the average worker in those areas was £660.90, £655.70 and £655 respectively in April 2014.

At the other end of the spectrum, the average weekly earnings of someone in West Somerset were just £287.30.

The ONS prefers to use the median as its measure of average earnings “as it is less affected by a relatively small number of very high earners and the skewed distribution of earnings”.

Because we’re using the median we’re not just recording those bankers in the City there. This is the number which 50% of the people earn more than and 50% less than in each area. And a goodly part of that recorded UK inequality is because of these regional differences in income.

It’s also true that living costs vary wildly across the country. Most especially housing costs of course although that’s not all. London prices for a pint would choke a fellow from West Somerset just as much as rents or house prices would do.

Given that this is all so then actual inequality is rather lower than we’re always told it it. For, of course, we should, if we’re going to be concerned about inequality at all, be concerned about inequality of consumption. And if people in one part of the country have higher wages but also face higher living costs then that’s an inequality that shouldn’t be concerning us.

In no other European country is the capital such a dominant force or influence in the economy,. Thus our inequality is different from their: and arguably our inequality is lower than it is elsewhere, given this specific difference.

The problem with low pay

The Resolution Foundation tells us that there’s some great big problem with low pay in the UK. Looking at their actual statistics though it’s difficult to see what the problem is. Of course, everyone would like more money for whatever it is that they do. But what keeps people in those low pay jobs seems to be that people opt to stay in those low pay jobs.

Only one in four low earners has managed to permanently escape the prison of low pay in the past decade, according to a major study published today.

The Resolution Foundation think tank uncovered the most graphic evidence to date of the scourge of in-work poverty, in which millions working part-time, in sales jobs and the hospitality industry, cannot move up the income ladder. Fewer than one in five people working in restaurants, pubs, takeaways and catering left low pay for good in the past 10 years.

A scourge, eh? Well, that’s what the Independent says. The report itself is a bit more measured.

And what they mention, but don’t emphasise, is the interesting stuff. For example, many on low pay actively decline to take promotions that will earn them more:

Part of the reason that many of these people who are usually in employment do not progress may be to do with the limited appeal of moving into positions of greater responsibility. The limited pay increases received for moving from an entry-level position to a supervisory role were often as little as 30p or 40p extra an hour. When weighed against the additional stress which comes with the role and the hassle of rearranging their work-life balance, for many people progression may not appeal.

They also find that those who stay in low pay over the long term tend to be single mothers and a number of people who are only in the workforce intermittently. And, of course, given that part time pay is generally lower than full time pay per hour the low paid (defined as those on less than two thirds of median hourly wage) are predominantly those working part time.

When we add all of that together, what do we see? The intermittency will at least in part be women leaving the workforce to have children. Single mothers are obviously balancing that work life balance, and the most common, we would think, reason for not taking a promotion that disrupts that work life balance would be the need to take care of children. And, of course, there’s many more women working part time than there are men for exactly the same reason.

It’s entirely true that it’s not in fact necessary for women to do the bulk of the childcare but that is the way our society generally works. So, we find women with children concentrated in those part time areas, not taking promotions, dropping in and out of the workforce as further children arrive. And thus earning low pay as these are the very things that seem to identify those who stay on low pay.

In other words the Resolution folks have simply found the flip side of the gender pay gap in the UK. That there isn’t one but there is a motherhood pay gap. Women with children generally earn less than men or women without children. It’s not a great stretch to move from that to the idea that women with children will be predominant among the low paid. And while they don’t emphasise this this is the rough outline of their finding.

And the point is that, despite everyone wanting more money for their labours, this is a result of the choices of those individuals. There’s a series of trade offs there, responsibility for higher pay, more rigid hours for higher pay, longer hours for higher pay and so on. And people are deciding which they prefer. Which ain’t the higher pay.

And, given that it’s all a result of individual choices there’s really nothing that we should be trying to do about it.