Good morning from New Economy Brief.
International Workers’ Day last week was marked by reports that the Labour Party’s plan to bolster workers’ rights risks being watered down due to pressure from business lobby groups.
This week’s New Economy Brief places this debate in context by examining the evidence for the wider economic impact of trade unions, including how stronger collective bargaining rights and better working conditions can be good for both workers and businesses, and could help build a stronger UK economy.
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New deal for workers under threat?
Rumours circulated in the media last week that Labour could water down their ‘New Deal for Working People’ – a plan to strengthen collective bargaining rights – amidst ‘internal pressure’ to drop the commitment to ban zero hour contracts within their first 100 days of power. Commentators worry that many Labour policies are being watered down because of the leadership’s perceived closeness to business lobbyists and the influence on policy this might give them.
Labour deny watering down to please business groups. Labour have denied any watering-down, but trade union leaders came out in force – Unite General Secretary Sharon Graham reiterated that delivering the New Deal “in full within the first 100 days of office” is a ‘red line’, and crossing it could mean withdrawing their election funding from Labour. But while the politics of the New Deal, including Labour’s relationship with key trade unions, have been much discussed, the place of this package in Labour’s wider economic policy thinking has received less attention.
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The economic case for stronger trade unions.
The context for the New Deal is that the UK has “the most restrictive anti-union laws in Europe”, following legislation by previous governments to reduce workers’ power relative to businesses. In seeking to reverse some of these changes, Labour say that workers’ rights are good not just for workers, but also for businesses and the wider economy. They note the “clear consensus between economists, business and trade unions, that fair and decent conditions of work improve productivity, economic opportunity, health and wellbeing.” In a speech to business leaders this week, Shadow Chancellor Rachel Reeves repeated the case for the New Deal and argued that improving workers’ rights through industrial partnership is not only the “right and the fair thing to do, but it’s also good for the economy”. But how?
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Investment and productivity.
The UK is less productive than most advanced economies, which many economists believe is because businesses and the government persistently fail to invest enough in capital and skills. There is a growing economic consensus that this lies at the heart of the UK’s growth stagnation since 2010.
Countering short-termist profiteering. In recent years more firms worldwide have been using profits to boost shareholders’ incomes rather than reinvesting in the business or raising wages. In the UK share buybacks have more than quadroupled since 2015 and dividends to the richest have soared. The Social Market Foundation’s Shreya Nanda explains how this leads to lower investment and a “wider cycle of business failure”. Robust evidence from 25 OECD countries shows that trade unions effectively counterbalance this short-termism by pressing companies to use profits to raise wages and investment.
More worker representation increases innovation. Firms with workers on their boards are more productive by 2-8% per employee, and there is also evidence that more worker participation in corporate governance increases the rate of capital formation in an economy. These firms are also less likely to cut investment in R&D as workers have a long-term interest in their firm and deep knowledge of its business. (See more evidence suggesting employee directors can reduce underinvestment.)
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Wages and inequality.
The UK has some of the worst income inequality in Europe. Real wages have stagnated since the financial crisis, and the OBR thinks it will be 2028 before they finally return to 2008 levels. The TUC’s latest analysis finds that the average worker is £200 a week worse off than they were before the global financial crisis, while the High Pay Centre reports that UK CEOs are paid 118 times as much as the average worker. Income inequality harms economic growth because lower earners spend much more of their income, so less money in their pay packets means less money flowing around local economies and less demand overall.
Reducing income inequality. A more equal power relationship between workers and business provides a counterweight that keeps income inequality in check by pushing for higher wages and restraining excessive management pay. Mainstream economists like Larry Summers attribute declining wages as a share of profits to the waning power of trade unions. There is consistent evidence that unions reduce wage and income inequality; one interesting paper from Alexander Guschanski and Özlem Onaran concludes: “Rising inequality is not an inevitable outcome of technological change or globalization. Tackling income inequality requires a restructuring of the institutional framework in which bargaining takes place and a level playing field where the bargaining power of labour is more in balance with that of capital.”
Smaller gender pay gaps. Women earn on average around 15% less than men per hour. There are several structural reasons for this – women are over-represented in part-time work, which is less well paid, and the ‘maternity penalty’ restricts their career progression. There is also evidence that women are less likely to engage in individual negotiations over pay. This means institutions that enable collective bargaining, like trade unions, can help reduce wage disparities between men and women; a recent study showed that workers covered by collective bargaining agreements tend to have smaller gender pay gaps.
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Stronger workers’ rights = a stronger economy.
In short, there is plenty of evidence that trade unions play an important role in creating stronger economies, and will be particularly vital in getting the UK economy out of its low-skill, low-wage, low-productivity and low-growth trap. Of course, there are interesting political aspects to the debate around extending workers’ rights – but we should also take it seriously as an economic argument in its own right. The question for Labour is not just whether diluting these plans is good politics, but also whether doing so would undermine their wider economic objectives.
Scotland’s future. The new Scottish First Minister must abandon “the policy playbook from the 1990s” to have any hope of reviving Scotland’s economy, according to Laurie Macfarlane of Future Economy Scotland. In a new blog, Macfarlane argues that the Scottish government should “match ambitious words with meaningful action” including by boosting investment, tackling economic rent seeking, and pursuing a Just Transition.
Council finances. Some local authorities are spending more on debt interest payments than they have in income, fuelling warnings about more potential bankruptcies. NIESR’s Max Mosley sets out how post-2010 funding cuts led councils to take on more debt, which made them especially vulnerable to a sharp rise in interest rates.
Fossil free Grid? The UK’s National Grid briefly ran almost without fossil fuels last week, raising hopes of a fossil-free grid by the end of the decade. Key drivers of the change include investment in new grid software which allows electric vehicles to defer charging until demand for power is lower, and a rapid increase in energy storage capacity. However the challenge of how to replace gas in the grid remains, according to former Climate Change Committee Chief Executive Chris Stark.
Dividend gap. Dividend payments to shareholders over the last three years grew 14 times faster than pay for workers across 31 major economies, according to a new report from Oxfam. In the UK, dividend payments increased by 13% in real terms between 2020 and 2023, while average wages stagnated. A Common Wealth report found that between 2000 and 2019, on average dividend payments grew 5.5% faster per year than wages in the UK. Common Wealth has launched a new data dashboard as part of its Centre for Democratising Work.
Make polluters pay. A tax on fossil fuel extraction in the world’s richest economies could raise $720bn by 2030 to support countries vulnerable to climate change, according to a new report backed by over 100 climate organisations worldwide. The report recommends that 80% of the new tax’s proceeds goes to the new Loss and Damage Fund, while 20% is retained as a ‘domestic dividend’ in the countries where the tax is imposed.
