From the TUC

Collective bargaining and wage-driven growth

13 May 2011, by Guest in Economics

Wage stagnation continues. On the back of last week’s report from the NIESR, and Mervyn King’s comments in January on the lag of incomes behind inflation and living costs, the Institute for Fiscal Studies today raised the prospect of average incomes for the current financial year falling to 2004-05 levels.

While this dents the Coalition’s plans for a speedy economic recovery, it adds further weight to the case for an alternative strategy based around wage-driven growth.

Chris Dillow posted an interesting piece at Stumbling and Mumbling yesterday in which he highlighted the alarming decline in private investment over the past two decades. This development goes against the Thatcherite assumption that higher corporate profits leads to increased investment, which was used to justify the active weakening of unions and strengthening of managerial prerogative.

He suggests that “if bashing the working class hasn’t raised capital spending and economic growth, maybe enriching it will”, citing E.F. Schmacher’s argument that:

“… redistribution towards workers would raise aggregate demand – because workers have a higher propensity to consume than capitalists. Although capitalists would suffer low profit margins, high aggregate demand would ensure a high output-capital ratio and thus high profit rates”.

In outlining the policies that could facilitate such a wage-driven growth strategy, Dillow stopped short of calling for the restoration of workers’ rights to organise and collectively bargain. But among the centre-left leaders and thinkers attending Policy Network’s Progressive Governance conference in Oslo this week, redressing the power imbalance between capital and labour in order to fuel consumption has been a recurring theme for discussion.

For instance, Jacob S. Hacker (Professor of Political Science at Yale) drew on recent experience in the US to argue that:

“Failure to enforce policies supporting workers’ organising rights has undermined labour unions as a force for good pay while corporate governance rules all but asked top executives to drive up their own earnings. Financial deregulation brought great riches for some while crashing the rest of the economy [which led to] the decoupling of aggregate productivity and most workers’ wages”.

As Peter Nolan pointed out in the Industrial Relations Journal recently, while US labour productivity levels have been stagnant since the late 1990s, they have remained relatively robust in continental Europe, particularly the Nordic states. He argues that support for decent work and “mutual accommodations between capital and labour over wages, productivity and profit” in Europe, compared with hostility towards organised labour and the decent work agenda in the US, explains much of this labour productivity gap.

Britain’s adoption of a liberal model of labour market regulation over the past three decades explains why it faces many of the same problems as the US. Weakened bargaining capacity at the workplace has led to a reduction in workers’ pay and thereby constrained their capacity to spend. An economic strategy based on increasing wages to help stimulate demand should therefore incorporate an element of labour market regulatory reform.

According to the ILO’s Global Wage Report 2010/11, collective bargaining and minimum wage policies have “the potential to create a solid flow of consumption demand for sustained growth and, at the same time, play the role of built-in stabilizer during economic downturns”. In the same vein, IMF Managing Director Dominique Strauss-Kahn said last month that “collective bargaining rights are important, especially in an environment of stagnating real wages… Stability depends on a strong middle class that can propel demand”.

While the Labour Party would undoubtedly hesitate at strengthening workers’ collective rights, lest it be seen as captive of the union movement, the economic rewards of such a reform could perhaps outweigh such political challenges.