Are trade unions the answer to the economic crisis?

Perhaps it was inevitable that, with the rekindling of interest in the economic analysis of Marx and Engels on the crest of the current global economic crisis, the idea of organised labour as a force for good would emerge somewhere down the line.

But a couple of columnists – Will Hutton in the Guardian and Nobel laureate, Joseph Stiglitz, in the New York Times – both refer to an unlikely advocate for trade unionism in pieces published over the weekend: the International Monetary Fund.

As Mr Hutton puts it: “I was stunned to read in a recent IMF working paper, with the hardly catchy title Income Inequality and Current Account Imbalances, that the whole – yes the whole – of the deterioration of the British current account deficit between the early 1970s and 2007 could be explained by the rise in British inequality. It is a similar, if less acute, story across the rest of the industrialised or, rather, deindustrialising west.

“What the IMF team shows is that as the share of national income devoted to profits and top pay rises to its current levels, so a noxious economic dynamic is created. By definition, there is less of the pie available to the mass of wage earners, whose real wages become squeezed. To sustain their living standards, they borrow, which has been easier than ever over the past 40 years as banks take advantage of financial deregulation. Overall demand thus carries on growing, but at the price of sucking in imports and ever higher personal debt levels for ordinary wage earners.”

“Finally, the music stops, as it has now, as both debt and import levels become unsustainable. The state of play in Britain – crazy levels of private sector debt and a record trade deficit – can thus be explained by the rise of inequality. And one of the chief causes of that, the IMF believes, is the decline in trade union bargaining power!”

“I would argue there is a further twist to the story. Inequality driven by weaker unions and labour market deregulation hits investment and innovation. Executive teams do not need to invest and innovate dynamically to earn rich personal rewards. They just need to be in post, squeezing the workforces’ real wages to lift profits, now the fast and easy route to apparent better performance, and thus to increase their own remuneration. And even if they do invest and innovate, the capacity to scale up production fast is hit because there are ever fewer consumers with rising real wages to buy the new products. Inequality is a recipe for stagnation. If Davos wants “resilient dynamism”, the delegates should be discussing how to reduce profits as a share of GDP to more normal levels, while boosting the real incomes of the mass of their workforces. Be sure this will not be on the agenda. For what it implies – better wage bargaining, new arrangements to share profits across the whole workforce, smarter labour market regulation and executive pay keyed to long-term innovation rather than annual profits growth – is the antithesis of all that Davos and the international consensus believe.”

And Professor Stiglitz: “Globalization, and the unbalanced way it has been pursued, has shifted bargaining power away from workers: firms can threaten to move elsewhere, especially when tax laws treat such overseas investments so favorably. This in turn has weakened unions, and though unions have sometimes been a source of rigidity, the countries that responded most effectively to the global financial crisis, like Germany and Sweden, have strong unions and strong systems of social protection.Far from being a shift to the left, this strikes me as being a shift to the right (with a small ‘r’ – as in doing the right thing).”

“In the UK, popular perception of organised labour remains rooted in a caricature spawned by the rhetoric of the 1970s and 80s; a period in which political debate became dominated by a narrative decrying the power of ‘trade union barons’.”

‘In the UK, popular perception of organised labour remains rooted in a caricature spawned by the rhetoric of the 1970s and 80s; a period in which political debate became dominated by a narrative decrying the power of ‘trade union barons’. Prof Joseph Stiglitz

“But under the governments of Margaret Thatcher, the spectre of union representation in the workplace was exorcised by legislation. And Mr Major and Mr Blair did not see any reason to tinker with the Iron Lady’s legacy.”

“Without doubt, the trade union leaders of this period have a great deal to answer for. As Mr Hutton says in his article: ‘Those with long memories will recall the militant opposition of the British trade union movement to co-determination – that is, putting workers on company boards – in the 1970s. Stupid.”

But – based on the analysis of both Mr Hutton and Prof Stiglitz – the extermination of the tradition of trade union membership could well have led to one version of tyranny being replaced by another: from ‘trade union barons’ to ‘barons of industry’. The latter’s self-enriching grip on the purse-strings means that inequitable distribution of wealth among workers has, in the end, helped contribute to the demise of demand for consumer products.

It’s a theory, at least. But I’m inclined towards it.

After all, think of all the places you’ve worked in the past, say, 20 years: would the presence of a body which represented employees have moderated some of the decision-making you’ve observed or been subject to? I suspect it would.

And would the presence of a body that represented employees have led to better decisions? Well only you can answer that one.

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