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

by John Quiggin on April 28, 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 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.

{ 14 comments }

1

david 04.28.16 at 3:19 am

thoughts:

– you are writing for a neoliberal readership; you need to overtly tackle the English concept of a union as a free association. Otherwise you get people nodding along about “helping unions” but recoiling from closed shops or non-secret ballots or mandatory contributions or the specter of blue-collar union leadership participating in a culture war. I think it would be good to talk about the Ghent system or Rand formula, especially if you intend to advance non-revolutionary Fabian tripartism as the ideal

– the nature of industry-wide collective agreements, esp those binding non-members like in the continent, likewise needs some explication

– your chronology (reasonably) simplifies history, but the effect is quite confusing. In particular the sentences “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 policy.” break the chronology

– consider a graph instead, for the timeline events and qualitative descriptions of labour strength. for readers less attached to data you may like to insert representative quotes from Eisenhower/Rockefeller Reps or the US Chamber or what-have-you to illustrate a past attitude, instead of just saying that such-and-such entity had such-and-such attitudes.

2

John Quiggin 04.28.16 at 3:43 am

Thanks for these useful comments. More like this (from you or others) would be great!

3

david 04.28.16 at 4:22 am

okay, more thoughts then:

– “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.”

I would not start with the the Pullis case to illustrate this; you’re walking readers into the modern trap of thinking of labour law mainly in terms of restrictions. Rather, you can emphasize the historical arc of the coercive contract – anti-enticement laws in the 19th, non-competes in the 20th, that sort of thing. The refusal to enforce certain kinds of contracts is something that does not readily occur to a modern reader.

– the larger political narrative of the rise-and-fall of 20th century collective bargaining (who is hostile to who) is worth knowing about – but it is not central to your main intuition that the bargaining system is a political rather than natural creature and, from behind the veil, we might well choose a tripartite one instead. Throughout your narrative you never actually wind up describing as single example of an allocated quasi-property-right that is moved from capital to labour to capital over the narrative: the desired framing is described but promptly not used to frame the chronology. Not sure how to salvage; consider a rewrite.

– if the pre/re distn is to be the main angle of attack, it needs to have a presence beyond the third paragraph. Distinguish between shifts on transfers vs shifts on bargaining powers, that sort of thing. Must highlight the changes in magnitude of pretax inequality

4

Brett 04.28.16 at 4:48 am

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.

Not so sure on this one. A lot of wages aren’t set via competition between workers and employers – they’re set by competition between employers . For example, with rare exceptions (Costco, Winco) the major retailers tend to have wages that are close for the same types of job categories.

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.

That would do it, especially since Taft-Hartley banned many of the most effective tactics of the 1930s strikes. Of course, it passed with legislature support so strong that it overrode a presidential veto, and has never been repealed even in periods where Democrats had overwhelming majorities and unions were far stronger.

5

bruce wilder 04.28.16 at 4:57 am

the incomes of top executives and financial sector professionals are regarded as reflecting control over capital, rather than as wages for labor

Just a quibble really: for top execs, it might be their control over labor that matters.

In a world of uncertainty, the marginal product of labor is a managed quantity. If negotiation or law (minimum wage) fixes the rate, management makes marginal product match.

More generally, the ability of the giant financial or media conglomerate to strategically direct all sides of what ought to be a negotiation among opposed interests ought to get some attention.

6

reason 04.28.16 at 9:13 am

I’m a bit wary of seeing monopoly power as the solution to monopoly power. Besides the general concern for unrepresented parties in negotiations, there is still the general problem that concentrated power is concentrated power (and so ripe for abuse). The best way to increase workers wages is:
1. Give them an alternative (i.e. increase employment, if necessary by government employment)
2. Give them more bargaining power, for instance via a basic income.

7

John Legge (@jmlegge) 04.28.16 at 11:35 am

Individual wage rates in enterprises are set by a combination of the mandatory minimum wage and a responsibility premium, reflecting the value and vulnerability of the capital equipment in use and/or the value and vulnerability of a single unit of production. Firms may add a seniority element to discourage labour turnover. Inter-firm competition will play a minor role for hourly paid “blue collar” and basic clerical jobs. It can be more important for professional workers. In either case industry associations carry out regular surveys which individual employers use to manage their pay structure. My Chapter 8 expands on most of these points.

8

cassander 04.28.16 at 2:18 pm

A history of anglo-unions that does not mention the sheer disaster excess union power led to and which attributes their declining popularity and membership to some mysterious political turn in the 80s borders on the outright dishonest. This is particularly the case since unuion membership started declining long before any changes in policy were made. The golden age of american unionism came after taft hartley. So did its decline. you can’t blame that legislation for the former without the latter. Equally problematic, at least in the american context, is talking about unions without mentioning that today they are mostly about government employees, negotiations between private sector actors.

9

Marshall 04.28.16 at 8:26 pm

Post Piketty, Saez, and Stantcheva (2014), you cannot discuss predistribution without also discussing effective marginal tax rates on the rich.

Somehow this “bargaining” view of progressive taxation was once orthodox in economics. See Seligman’s famous book on the income tax, for example. What was once de rigueur is now all but forgotten, and would be totally forgotten but for that 2014 paper. Take note!

10

Alex 04.29.16 at 9:45 pm

“A history of anglo-unions that does not mention the sheer disaster excess union power led to”

No, that “disaster” (and really, the 1970s in the UK were not a disastrous time, on balance) was the fault of the government that didn’t treat the miners fairly. In other words, it was the fault of the bosses, as is the case in almost every strike.

11

MANOEL GALDINO 05.01.16 at 12:50 pm

I liked it lot. But I missed some discussion about the effect of racism and sexism on the distribution of income. See for instance the credit discrimination as documented by Ta-Nehise Coates.

My feeling is that your general narrative is right for white people, but not so much for Black ones. If I’m wrong, I’d love if you could make a case that unionism really helped the black people.

12

Stephen Frug 05.02.16 at 3:33 am

No particular critiques to offer, helpful or otherwise, but I am quite looking forward to reading this book.

13

Ilya 05.04.16 at 6:23 pm

John,

You write “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.”

What data are you using? Here in the USA, going back through 1929 I don’t see any relationship between the New Deal, labor unionization and the labor share.

See here: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1806.en.pdf?43dbe97df738c3f9beece40ad1af0560

If you look at the PI2-GDP on page 10 its quite clear that the labor share remained at a constant share of 0.67 from the mid thirties through 2000.

14

John Quiggin 05.07.16 at 12:58 am

Ilya, sorry to be slow in replying. But the source you cite states “the US labor share has not only declined
after 1970, but also substantially increased before that, exhibiting a hump-shaped pattern over the
last 84 years”, which seems to be pretty much consistent with what I’ve written.

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