We can be both pro-business and pro-union. Here’s how

If Labour is to be bold it could offer subsidies to encourage trade union membership through tax relief. But go one step further.

Trade unions against hate, PCS union

Christopher Worrall is a housing columnist for LFF. He is on the Executive Committee of the Labour Housing Group, Co-Host of the Priced Out Podcast, and Chair of the Local Government and Housing Member Policy Group of the Fabian Society. 

Collective bargaining is a central tenet of freedom of association, a fundamental human right as proclaimed in the Universal Declaration of Human Rights. Notably Article 20, which states everyone has the right to freedom of peaceful assembly and association. It effectively allows participation of non-state actors in economic and social policy. Ultimately it is this liberal belief that rests at the heart of democracy and the rule of law. 

As a result of people expressing this freedom, unions represent one of the most powerful labour market institutions in the developed world. But it is no secret that trade union membership levels across the world have been in long-term decline. In particular, in places where labour rights are routinely violated. We have seen the Conservative government here in the UK water down trade union rights. Following the introduction of the Trade Union Act (TUA) 2016, which introduced new restrictions on trade unions and their members as to how and when they could take industrial action, fund political parties, and conduct their duties.

When Labour last came to power here in the UK, back in 1997, the percentage of employees that were members of a trade union was at 29.9%. Statistics now suggest this level is at 22.3% for as recently as 2022. The decrease has been driven by more private sector members not being members of a union, with this figure currently sitting at 2.4 million. The lowest level on record.

Ultimately markets set wages. And much of the modern policy debate concerns whether the perceived benefits unions bestow on their members compromise the profitability and productivity of firms. Some suggest unions harm overall employment and economic efficiency, while others argue on balance they provide benefits.

Back in 1982 Richard Freeman and James Medoff, two prominent members of the Harvard Economics Department, argued in their paper “What Do Unions Do?”, that there were two faces of unionism. One with largely undesirable consequences for society and one with largely beneficial results. They argued the empirical evidence showed that the beneficial face predominates. The undesirable face is the one wearing the mask of monopoly, which allows unions to raise wages above the competitive level. The beneficial face is the collective voice-institutional response face. This face enables unions to channel worker discontent into improved workplace conditions.

Unions in effect drive a union wage premium. With evidence showing employees who are members of union often have higher wages than their un-unionised counterparts. Those who still believe unions have an undesirable effect argue that this has negative profit effects, which in turn results in reduced employment as profits fall.

Yet recent evidence shown in a report by Dodini, Stansbury, and Willen (How Do Firms Respond to Unions, 2023) show that the average manufacturing firm increases employment and scales up production, charges higher prices in the product market, while enjoying increased employee value added per worker. All alongside no decrease in profits. In effect, larger firms increase employment and output at the same time as their ability to mark up their prices is growing. This then offsets the aforementioned negative profit effects.

The research explored how firms responded to shifts in union density, which is the ratio of wage and salary earners that are trade union members to the total number of earners in the economy. In Norway, the government made policy changes that facilitated tax deductibility measures that union members could take to pay for their membership between 2002 and 2010. This significantly reduced the membership cost of joining a union for workers whose dues were previously bounded by a tax deduction cap.

In studying this data, the researchers found that unions in the Norwegian manufacturing sector counteract employer monopsony power, which results in higher wages and employment. Monopsony being a market condition where there is only one buyer the monopsonist, which like monopoly, has imperfect market conditions. Monopsonists are common in area where they supply all or most of the region’s jobs. Such situations mean a single buyer (or employer) has a controlling advantage that drives prices down. The main difference between monopoly and monopsony is that the latter is a market condition that has only one buyer who can drive prices down. While a monopoly is only one seller that can drive prices up.

They also found that unions in Norway’s manufacturing sector redistribute economic resources from consumers to workers, as the rising labour costs are passed onto consumers through higher prices. In addition to, reallocating labour and revenue share from small and less unionised firms, towards large and more unionised firms. The research found no negative effect on profits. This is because large manufacturing firms possess a substantial degree of power in both product and labour markets.

Furthermore, the research found that increases in union density (membership) increase compensation per worker, lead to the average manufacturing firm to expand, increased nominal productivity, an increase in product price mark ups and a decrease in labour mark downs. The average manufacturing firm passes on the entire increase in labour cost through prices. In effect, unions have productivity-enhancing effects.

But what did this mean in practice for Norway? Well overall price levels in Norway would have been 2.7-5.9% lower in the absence of the change in union subsidies. Meanwhile at the same time the subsidies for union membership increased wages by approximately 5.5-12% between 2001 and 2014. What this shows is the average manufacturing worker is better off as unionisation increases. It also shows that there is no reduction in the health of the manufacturing business community in response to the rise in unionisation.

Yet if we reflect once more back onto the UK, but this time led by Keir Starmer, we can envisage a country that is both pro-business and pro-union, one that strengthens the role of trade unions in our society. A country where wage growth and workers conditions improve, without being detrimental to business. But one big trend Keir Starmer could buck is the decline in unionisation of workers.

If Labour is to be bold it could offer subsidies to encourage trade union membership through tax relief. But go one step further. There are concerns less than 4% of construction workers will be members of a trade union in thirty years’ time. Less than half of where it is now at 9.8%. One way of bucking the trend would be to link union access to planning permissions, as part of Keir’s bold planning reform proposals. Not only is a blitz of planning reform needed to quickly boost housebuilding, it could be done to boost union membership too.

Because of the short term nature of construction projects many workers who work agency are paid by main contractors through agencies via umbrella companies. This can often result in missing pension contributions, unfair employer rates of National Insurance Contributions, non-payment of wages, amongst other problems. The Low Incomes Tax Reform Group had written a report on Labour Market Intermediaries, which showed that in 2021 umbrella companies paid 600,000 workers, with 50% of workers handed to umbrella companies to be paid across all sectors.

Notwithstanding the above, with the construction sector such a vital pillar in the future success of planning reform, opening union access through planning permissions would seem a sensible step. To date we have already seen some successes with developers of infrastructure. Case in point being the GMB recently signing a deal with the company developing HS2’s Birmingham station. The Joint Venture building the station, MaceDragados, gave GMB access to the workforce allowing them to meet members and recruit reps to further strengthen the GMB’s involvement in the construction of HS2. This means by choosing to join the union workers can rest assured that the likes of the GMB will make sure standards in health, safety, and wellbeing are maintained.

Planning for union access can go beyond just the construction sector. Industrial land permitted and leased can also include union access rights. In providing access workers have the choice and the opportunity to join. It is after all a fundamental human right that no one may be compelled to belong to an association, but everyone has the right to peaceful assembly and association. In granting access through planning permissions workers can be given that opportunity. All with the benefit of the government knowing it won’t harm the profitability and productivity of firms.

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