Thursday, February 25, 2010

The class struggle in one picture

Social Democratic economic theory is that unions and collective bargaining can dramatically improve the earnings of the working class relative to owners of capital.

Neoclassical economic theory in contrast predicts that unions are not needed. Competition among firms for workers ensures that labor get's its marginal product. Social Democrats believe this is naive.

There is simple and powerful evidence that the Social Democratic theory is wrong and the neoclassical theory is correct.

I have plotted the share of workers that are covered by collective bargaining agreements. This is better than the share of workers that are members of unions. In some countries, such as France, few workers are actually members of unions, but unions have the power to determine contracts for workers that are not members. There are huge differences across countries. In Sweden and France 90% of workers are covered by collective union agreements. In the U.S and Japan only 15% of workers have their wages determined by unions.

I also plot the share of national factor costs that goes to labor (as wages and compensations). What you will notice is that this does not vary systematic across countries.

The way the economy gets divided between capitalists and workers is virtually identical in weak union countries such as the U.S as it is in countries with powerful unions, such as France and Sweden.

If anything, American workers with weak unions get a bigger share of the cake compared to European workers with strong unions. Due to high labor costs, European workers have to some extent been replaced by machines.

Italian workers get slightly less than other countries. The reason I believe is that they have a high share of self-employed, which does not fit nice in the capital-labor divide.

So are unions useless? Not entirely. Unions can raise the wage of some workers, but not at the expense of capital, but at the expense of consumers (mainly other workers), or perhaps single "rent" earning industries (such as mining or years ago American auto). This is good and well for those few workers, but does not work as a large scale redistribution program, since workers are just transferring resources from other workers.

Second, Unions seem to be better able to extract rent within the class of workers, from high skilled to low skilled workers, than they can do with capital, which is very responsive to returns. If capital earnings go down, investments in capital goes down, or is perhaps re-located to other countries. In contrast I.Q. and education seem less elastic in supply, so they can be taxed more by unions.

This simple graph can tell us a lot about the economy, and is a powerful argument against the world-view of the left.


  1. Interesting. What are the sources for the two sets of data?

  2. Both OECD, labor share from OECD productivity database, and union coverage from a OECD report on growth.

  3. Could minimum wage laws be playing a role here too? I am told that many of the high trade union countries dispense with them, since most employees are covered by a collective agreement.

  4. Yes, Sweden has the highest effective minimum wages in the world, even though there is no legal one. But even including the minimum wage there is no effect on distribution between capital and labor.

    Seems they are taking the minimum wage rent from other workers, not from capital.

  5. Yeah - like the share of labour costs in the Finnish paper industry is about 5%, they are 100% unionized and that proves that it´s not a good idea to unionize.
    In reality paper mill workers are among the highest paid industrial workers in Finland, possibly in the world. The percentages just say that this work is very highly automated, only a few workers are needed.

  6. Raimo:

    Can you explain why in the aggregate Finish workers get the same share of national output as workers is much less unionnized countries?

  7. The "labor share" includes management salaries, and they arrange to keep what ever is left after bargaining down the people who actually do the work. The commonality of interests of the management class (including union management and middleman financiers) generally avoids competing for capital by cutting total management salaries - the workers have less power, so they get less. The truth is swept under the rug by reporting "labor" as including management salaries. Who does the accounting, after all?

    There are other problems with the "labor share" metric. What are apparently small differences in share are really much larger than they at first appear, similar to gross employment rates which shift by only a percent or two even while unemployment shifts by a factor of 3. Share of total factor costs does not account for the increases in productivity correlated with unions and the benefits they have made standard. (See the French and German hourly productivity numbers, for example.) Even with low rates of unionization, the standards set for the whole market have positive effects - no 14-hour days for poverty wages, compensation when the job takes your leg or your life (and without which the management would have no market force restraining them from behaving as they did in 19th century coal mines.) There are too many confounding factors for your analysis to be meaningful.

    A better measure would be net private-sector non-management hourly incomes (minus all taxes including sales/VAT, union dues, net of NPV of lifetime transfer payments and social insurance) as a percentage of private-sector GDP per capita. Even that doesn't account for some crucial things. The insurance value of not having to worry about the sort of destitution that often happens in the US is considerable in log-utility - a certainty of that first $12000 is worth more than the next $144M, in very real terms. Knowing that your job won't be shipped to China and your pension won't be looted so the CEO can cash out also has a big insurance value. The intangible benefits of a 35-hour workweek and 5 weeks of vacation also go beyond what shows up in the numbers.

    And another thing - "capital" doesn't run things - management does, and they take most of the increase (which is ultimately entirely created by intellectual and creative capital - mostly the inventions and designs of those with high IQs), and the parasites in finance get most of the rest. The savers of earned money - the true source of financial capital - are mostly middle class people, (not the rentiers in law, medicine, insurance, real estate, finance and management), and they actually get less than nothing after risk, tax, inflation and fees.


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