Economic challenges could be helped through collective bargaining

Chris Wright 13 December 2011 Collective bargaining is a collective good As CHris Wright so correctly suggested in his article in Left Foot Forward earlier in the year, rebalancing the economy can best be achieved through strong, independent collective bargaining procedures

Commentary icon13 Dec 2011|Comment

Chris Wright

13 December 2011

Collective bargaining is a collective good

As CHris Wright so correctly suggested in his article in Left Foot Forward earlier in the year, rebalancing the economy can best be achieved through strong, independent collective bargaining procedures

George Osborne said in his budget statement in March that the government was committed to making Britain “a world leader in advanced manufacturing” as part of its plan for economic growth and job creation. But apart from a few measures aimed at freeing regulatory burdens on business, and some rather piecemeal initiatives around apprenticeships, Mr Osborne was light on the detail of how this would be achieved.

Ed Miliband set out his vision for growth in a speech to the Resolution Foundation, in which he called for “a different sort of economy” based around “high-productivity, high skill … quality jobs and a better quality of life”, through a Northern European-style “active industrial strategy”.

In doing so, Miliband attacked New Labour’s economic record in government, by claiming:

“…we were wrong not to focus more on the type of economy we were building.”

This is a welcome admission. For all its focus on breaking what some academic commentators have described as the “low wage, low skills, low productivity equilibrium” that has long plagued the British economy, there was little if any improvement on all three of these indicators between 1997 and 2010, as recent publications from the government’s own UK Commission for Employment and Skills and the highly respected ESRC Centre on Skills, Knowledge and Organisational Performance show.

While Miliband’s vision was more progressive than anything implemented by Tony Blair or Gordon Brown, his measures for achieving this vision – such as tax incentives to positively influence business behaviour – essentially echoed New Labour’s failed supply-side prescriptions.

A number of academic studies have suggested that Britain’s flexible model of labour market regulation is one of the biggest factors preventing the ‘high road’ industrial growth strategy that both Osborne and Miliband claim to want. Britain’s political leaders would do well to look closer at the factors that have allowed Northern European economies to maintain competitive manufacturing bases.

They would find that industry-wide collective bargaining, and strong systems of collective worker representation, are key ingredients in the mix of productive work organisation, good labour management practices, high quality jobs, and the longer-term business investment focus that are central to the high road Northern European model.

Neither Labour nor the Conservatives acknowledge the positive role that stronger labour market regulation could play because this would entail a greater role for trade unions. Of course, Miliband feels he cannot say this for political pragmatic reasons, and Osborne will not say so for ideological ones.

While public discourse in Britain continues to associate unions with the miners’ strike and the ‘winter of discontent’, the large decline in the number of workers that have their pay and working conditions determined by a union-negotiated collective bargaining agreement (from 70% in 1984 to 33% in 2009) has not necessarily led to better economic and social outcomes.

The proportion of the UK workforce that is classified as ‘low-paid’ (defined as those earning less than two-thirds of the median hourly wage) now stands at the comparatively high rate of 22%, compared to 15% in the late 1970s.

The UK’s relative standing in terms of income inequality has also become progressively worse, to the extent that it now the 24th least equal country in the OECD (behind only Italy, the US, Poland, Portugal, Turkey and Mexico).

This is a development with economic implications, as well as social ones. The decline in collective bargaining both here and abroad has coincided with a weakening of the link between economic growth and wage growth. The squeezing of personal incomes in the US fuelled a demand for cheap credit and was a key reason underpinning the global financial crisis, as Robert Reich and others have argued.

A report last week by the Institute for Fiscal Studies supported Mervyn King’s earlier observation that incomes in Britain continue to lag significantly behind inflation and living costs, which aside from hurting working families will inevitably hinder the prospects of a speedy economic recovery.

The ILO’s Global Wages Report 2008/09 found that in countries with a higher rate of collective bargaining coverage, the connection between economic growth and wage growth was noticeably higher than in countries with a lower rate of collective bargaining coverage. This led to ILO to conclude that collective bargaining helps to provide an institutional link between business performance and employee reward at the workplace level, with economic growth and incomes growth at the national level.

The real decline in incomes is a looming as a big economic problem, and the government lacks a coherent plan to address it. The encouragement of collective bargaining through regulatory reform should be part of the solution.

This might sound fanciful given the current political climate, but as Professor Keith Ewing reminds us, the last government that promoted collective bargaining in order to increase wages and by extension demand was a Conservative-led one.

Chris Wright

Chris Wright Chris Wright Chris Wright is an ESRC Placement Fellow at the Faculty of Economics at Cambridge University.