Home > Economics - General > Predistribution: wages and unions (extract from Economics in Two Lessons)

Predistribution: wages and unions (extract from Economics in Two Lessons)

April 28th, 2016

Over the fold, an extract from my book-in-very slow-progress, Economics in Two Lessons. I’m getting closer to a complete draft, and I plan, Real Soon Now, to post the material so far in a more accessible form. But for the moment, I’ll toss up an extract which is, I hope, largely self-sufficient. Encouragement is welcome, constructive criticism even more so.

The book is aimed at a US audience (if it goes well, an Australian edition will follow, as with Zombie Economics). So, there are US-specific institutional points, but the general argument is applicable more broadly.

the logic of opportunity cost does not begin, as Hazlitt and others in the propertarian tradition assume, with a pre-ordained distribution of property rights. Rather, the allocation of property rights, including entitlements such as social security and labor rights, is itself a social choice. Every such choice involves both benefits and opportunity costs.

Following this argument, one way to think about the way society determines the allocation of income and consumption is based on a distinction between ‘predistribution’ and ‘redistribution’. Here ‘predistribution’ refers to the setting of the property rights and other rules that determine the distribution of wages, profits and other incomes arising from markets. ‘Redistribution’ refers to taxation and expenditure policies that change the final distribution of income and consumption relative to the market outcome.

The biggest single factor in determining the distribution of market income is the relative shares going to wages on the one hand, and to capital incomes (rent, interest, dividends and capital gains) on the other. (FN: The division is even sharper if the incomes of top executives and financial sector professionals are regarded as reflecting control over capital, rather than as wages for labor).

This division is often treated as the outcome of a competitive market process, beginning with an allocation of property rights in which workers own their labor, while everything else belongs to property owners. This is, however, a drastic oversimplification.

The wages that emerge from labor markets are the products of a complex process of implicit and explicit bargaining between workers, employers and (where they exist) unions. The outcomes of those bargains depend on the relative power of the parties and that in turn depends on the rules set out by society.

This is most obvious in relation to unions. Laws relating to unions have ranged from outright prohibition (the situation prevailing under US law at the beginning of the 19th century https://en.wikipedia.org/wiki/Commonwealth_v._Pullis) to (pre-entry) ‘closed shops’ in which only union members may be hired. Neither outright illegality nor pre-entry closed shops prevail in the United States at present. Rather the divide is between states allowing ‘union shops’ (in which unions can, under very restrictive conditions act as bargaining agents for all workers) and ‘right to work’ states in which this is forbidden.

In the first half of the 20th century, the political and economic environment became increasingly favourable to unions and workers. As a result, union membership boomed, reaching its peak in the 1950s. The result, along with other elements of the New Deal was a massive reduction in economic inequality in the US (and other developed countries), to the lowest levels in history. Combined with strong economic growth, this produced an era of middle class prosperity which, even as it fades from memory, dominates our expectations of the way an economy ought to work.

Since the 1950s, however, unions have been steadily weakened both by changes in the law and by increasingly aggressive and effective anti-union strategies. The process began with the Taft-Hartley Act of 1947 (outlawing closed shops and greatly restricting the right to strike). It accelerated markedly, throughout the developed world after the resurgence of the financial sector and the ideology of market liberalism.

The anti-union legislation were reinforced by discretionary policyIn the mid-20th century, governments generally presented themselves as neutral arbiters between workers and employers, seeking to promote fair and harmonious outcomes consistent with widely shared prosperity. There was a general acceptance of the legitimacy of trade unions as reflected in international conventions such as those of the International Labor Organisation.

By contrast, from the 1980s onwards, the stance of government was one of overt or covert hostility, depending on whether the party in office was nominally of the right or the centre-left. The iconic leaders of the right, such as Reagan and Thatcher, established themselves by breaking strikes and crushing the unions involved. The anti-union position was enshrined in UK legislation such as the Employment Acts of 1980 and 1982 and the Trade Union legislation. The Reagan Administration, lacking a majority in Congress relied primarily on appointing anti-union officials to bodies such as the National Labor Relations Board. The rulings of these officials greatly restricted the scope of strike action, and enhanced the power of employers to dismiss striking workers.

Notionally centre-left leaders such as Bill Clinton and Tony Blair retained, and in some cases, extended the anti-union legislation and regulation of their predecessors. These advocates of the “Third Way’ were particularly hostile to unionism among public sector workers, most notably teachers’ unions. This is evident, for example, in the policies of Rahm Emanuel, Clinton adviser, and chief of staff under the Obama Administration who has pursued an anti-union campaign as Mayor of Chicago.

The result has been a dramatic decline in union membership particularly in English speaking countries, and an associated decline in the labour share of national income. This decline has been accompanied by an increase in inequality among workers. Highly educated professionals have done better than manual workers, though both have lost ground relative to managers and owners of capital.

It is often assumed that the decline of unionism is irreversible and that unions are simply irrelevant under modern conditions. There is no good reason to believe this. On the contrary, survey shows that a great many workers would like to join unions, but are unable, or too worried about the prospect of reprisal, to do so. http://www.gpn.org/bp182.html This reinforces the point that the decline of unionism is the product of decades of anti-union law and policy.

What has been legislated can be repealed. The more fundamental change that is needed is a revision of assumptions that are taken for granted, throughout the political process, that corporations are a natural feature of market economies, while unions are an alien intrusion. This attitude, shared across the spectrum of mainstream political opinion is only now under challenge.

As we will see in the next section, corporations, like unions, are social constructions, which could not exist except as a result of conscious policy decisions to change the rules of a market economy. A policy that begins with implicit assumptions in favor of corporations, and against unions, is one in which inequality is guaranteed.

There is not enough space in a book of this kind to discuss the many changes that would be need to restore balance in bargaining between workers and employers. But in the US context, the obvious political demand is to begin at the beginning, by repealing the Taft-Hartley Act and restoring the pro-labor framework of the New Deal Wagner Act.

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  1. Matt C
    April 28th, 2016 at 13:19 | #1

    Hi John,
    Good piece!

    One thing I’d add is a brief aside noting the interdependency between re- and pre-distributive policies. For example, tax policy can affect the labour share of income, and unions’ strength in the workplace can affect tax/transfer policy.

  2. April 28th, 2016 at 14:42 | #2

    There are many ways to distribute more of the profits to labour. This already happens with managers through share plans. There are many examples of profit sharing amongst all the workers. Other examples are workers getting low cost product, e.g. airlines with low cost travel. It is becoming easier for workers to connect with social media, including internal company systems. This makes organising workers simpler and easier to do locally and it is easy to connect across companies. With the rise of part-time and casual work unions are likely to increasingly adopt strategies using “part-time” and casual union membership.

  3. Ikonoclast
    April 29th, 2016 at 07:07 | #3

    The whole discussion assumes that the only way of organising an economy is to have labour and capital as opposing interests. It assumes that economics must and can only be an eternal battle between the interests of labour and capital. The discussion remains trapped in the system that generates the problems. We need to more radically challenge the fundamental assumptions of modern economics.

    “What has been legislated can be repealed. The more fundamental change that is needed is a revision of assumptions that are taken for granted, throughout the political process, that corporations are a natural feature of market economies, while unions are an alien intrusion. This attitude, shared across the spectrum of mainstream political opinion is only now under challenge.”

    This passage indicates a groping towards answers, certainly. But “market economies” is a euphemism and an inaccurate one at that. The system is capitalism. The defining characteristic is not the markets but the (highly inequitable) ownership of capital. Yes indeed, we need a revision of assumptions that are taken for granted. The revision that is most vitally needed is of the assumption that capitalists must exist at all.

  4. Kien Choong
    April 29th, 2016 at 21:01 | #4

    I sometimes wonder why policy makers (eg Productivity Commission) worry about unions driving up wages. Surely workers and unions will do everything possible to keep the firm competitive. Workers are as interested as shareholders in the long-term profitability of firms.

    If the issue is that industry wide unions are not subject to competitive pressures, then a possible policy approach is to extend competition regulation to unions. Industry wide unions would be broken up, and prohibited from colluding/cooperating to raise wages across the industry. Intra-industry competition would prevent or deter unions from raising wages so high that the firm becomes uncompetitive.

    Also, I would give unions/workers a voice at boards, to encourage unions/workers to think and care about the viability of the firm as a whole, not just the interest of employees of the firm.

  5. Charlene MacDonald
    April 30th, 2016 at 18:32 | #5

    Surely workers and unions will do everything possible to keep the firm competitive.

    This is not consistent with my lived experience. I’ve a bridge to sell you.

  6. Ikonoclast
    April 30th, 2016 at 19:02 | #6

    @Charlene MacDonald

    It is consistent with the lived experience of German workers, German Unions and German Companies.

    “Co-determination is a practice whereby the employees have a role in the management of a company. The word is a literal translation from the German word Mitbestimmung. Co-determination rights are different in different legal environments. In some countries, like the USA, the workers have virtually no role in corporate management; and in others, like Germany, their role is more important. The first serious co-determination laws began in Germany through collective agreements in 1918.[1] In 1976, a general law was passed mandating that worker representatives hold seats on the boards of all companies employing over 500 people.” – Wikipedia.

    The key issue is whether workers are shut out of information sharing and decision-making or if they are included. If the workers are shut out how can they make informed decisions and arrive at a consensus which might help them and their companies?

  7. Collin Street
    April 30th, 2016 at 19:28 | #7

    This is not consistent with my lived experience.

    If you want us to engage with you, give us a bone. You haven’t even said what your experience was! there’s literally no responsive thing we can say. We can’t disagree, because we don’t have any reason to… but we can’t agree either, because we don’t have any reason to do that, either. There’s nothing anyone can say in response to your statement, it shuts down conversation and blocks away possible insights, for you and others.

    As a general rule: your reasons for coming to whatever your conclusions are are more useful to others than the conclusions themselves; the work involved in working out conclusions from evidence, anyone can do that. It’s your experiences themselves that are more useful/interesting to me.

    So. Better would be, “Actually, when I was at Xcorp back when Greiner was PM the shop steward made a habit of [unsuitable for family website], and much the same thing happened to my friend at Sigmaceuticals”. That way we learn something. That way

    But “I think X” is useless.

    I mean, if I’d written, “what you wrote was useless”, that’d be useless for you, right? Nothing you could learn. You can only learn from what I’m writing because I’m going into the background and the reasons; even if you disagree — and you may well disagree — at least you’ll know what it is you’re disagreeing, and maybe you get some insight.

    But “I think X” is useless.

  8. Zvyozdochka (@Zvyozdochka)
    May 1st, 2016 at 19:07 | #8

    PJQ, when your new book is complete your people might be able to get in touch with Bill Maher’s people in the US if you were so inclined to do a book tour.

    He has a progressive TV program ‘Realtime’ and often refers to zombie ideas, zombie economics, and I’m pretty sure he has said he’s read your book. He has been using those terms for many many years.

  9. Peter Kirsop
    May 10th, 2016 at 06:54 | #9

    Professor, “One Nation” Tories like Lord Birkenhead (Lord Chancellor in Baldwin’s first government) who wrote


    The Conservative Party is the parent of trade unionism, just as it is the author of the Factory Acts. At every stage in the history of the nineteenth century it is to Toryism that trade unionism has looked for help and support against the oppressions of the Manchester School of liberalism, which cared nothing for the interests of the state, and regarded men as brute beasts whose labour could be bought and sold at the cheapest price, irrespective of all other considerations.

    “Industrial Unrest” in Unionist Policy and Other Essays (1913).
    supported trade unions.
    But your extract start with an assumption- can you send some time and demonstrate Hazlitt is wrong- either morally or because his economics gives worse outcomes? You did that a bit in Zombie Economics but you didn’t there give a lot of history which shows that the current economic poliicies give worse outcomes than that followed by Australia under Mr Chilfley and Sir Robert Menizes In an American context I am thinking here partly of Adam Smith’s advice to the infant USA to be an agricultural nation and support free trade as opposed to Alexander Hamilton’s protectionist policies. Please – the whole of libertarian economics needs to be exposed for what it is- a bunch of cranks.

  10. John Quiggin
    May 10th, 2016 at 09:52 | #10

    Thanks everyone for useful comments

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