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

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 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.