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If stronger labour unions are the answer, how do you unionise the unemployed?

If stronger labour unions are the answer, how do you unionise the unemployed?

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Prateek Buch of the Social Liberal Forum has written a thoughtful response to my recent piece on why stronger labour unions may not offer a solution to the UK’s current economic woes.

In answering him I would like to first reiterate that I believe “there is a case for introducing some additional measures to support workers who find their incomes falling sharply in a downturn”. This particularly applies to those areas of work that have traditionally not been unionised – for example self-employed or part-time workers whose wages have fallen dramatically in recent years.

His central case is that stronger employee engagement with management need not result in the replacement of human labour with machines or “off-shoring” jobs to countries with lower cost labour. On a country-specific level I would agree to a large extent with these sentiments, but I also think Buch misses the larger point about global competitiveness and the irrepressible march of technological progress. 

Buch’s arguments revolve around two contemporary examples of countries with relatively strong collective bargaining arrangements – Germany and Denmark. I know fairly little about how the latter’s labour market works so I will confine my observations to the former. 

There have been two main events in recent history that have defined Germany’s economic performance and labour market competitiveness. The first is the process of reunification of East and West Germany from 1990 following the collapse of the USSR.

Reintegration was, and indeed remains, a national project undertaken at considerable cost to the German state. The disparities between the two economies had to be bridged with huge fiscal transfers to allow for the integration of infrastructure, government and labour markets.

In both its scale and its cultural significance this was an ambitious and laudable undertaking. But it was not without consequences. Below are charts showing the unit labour costs of Germany and the UK from 1991 to 2013: 

What should be clear is that while Britain’s labour costs increased almost without interruption for the past twenty years, Germany’s effectively stagnated for over a decade. What this may well reflect is the huge influx of cheap labour from East Germany helping to keep wage growth low. That many German workers may have accepted these conditions as a justifiable cost of reunification again is praiseworthy but it hardly speaks to the success of collective bargaining.

Moreover, the resilience of the German economy over the crisis has been largely maintained by the relative weakness of the euro. In effect the crisis in the periphery has acted as a trade subsidy for German exports. The role that labour unions have played in restraining German wage growth, therefore, could be seen as postponing much needed structural adjustment within the Eurozone.

This is not to disparage productive relationships between employees and employers. Fundamentally my point is that the debate that needs to be had is a much broader one about what kind of labour market we want.

As Marcuse suggested, automation can be delayed by the actions of workers but the cost of ignoring new technology could be that your competitors elsewhere take it up – weakening the position of both capital and labour. What he failed to mention is that, as we have seen in recent years, the process can also grind to a halt when there is a global investment strike (companies cannot see a benefit in buying new machines or factories).

With highly flexible labour markets, such as those we appear to have in the UK, firms can replace this lack of long-term investment by buying in cheap short-term labour (or off-shoring labour where possible) to more effectively exploit existing resources. This leaves labour with a weak bargaining position as competition for work encourages people to bid down their own cost - in many cases below a level that a wealthy society should deem acceptable.

To bridge these problems either we need stronger labour market regulation – although they could well provide an incentive for firms to invest in machinery rather than employees – or allow the process of increasing flexibility in the labour market to continue. If you assume the latter provides the best economic outcome for a post-industrialised society where the production of goods requires less and less human labour (see charts from the ONS below) then we as a society need to work out how to give people the financial security that a “job for life” used to provide.

The corporate strategies currently being used to maintain profit margins undoubtedly suffer from diminishing returns as falling domestic incomes ultimately diminishes demand and cheap overseas labour markets become more expensive. Where I wholeheartedly agree with Buch is that starting a conversation between the public, employers and policymakers on this issue is a necessary first step. 

Yet if stronger labour unions are the answer the question that Buch needs to answer is – how do you unionise the unemployed?

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