As the Government’s Trade Union Bill progresses through Parliament, the New Economics Foundation (NEF) and the University of Greenwich launch a new report, which examines the impact unions have on the UK economy. It argues that – far from unions being a drag on growth – it is the decline in union membership over the past thirty years that has had negative impact on national prosperity. The research claims that rebuilding unions could inject £27.2bn back into the UK’s wage-led economy. You can sign up for the launch event on 27^th October here.

 

Making the  economic case for trade unions

The controversial Trade Union Bill currently making its way through Parliament proposes restrictions on union activity and strike ballots which would have significant administrative and financial implications. The Trades Union Congress has said it amounts to the biggest attack on unions in three decades.

Announced in the Queen’s Speech earlier this year, the proposed legislation is part of the Government’s stated objective of making Britain "the most prosperous major economy in the world by 2030". And yet, when exploring the justification for the claims that restricting union activity would increase national prosperity, researchers have found a gaping hole where there should be a body of evidence.

It would appear the claims are based on a woolly assumption that unions reduce national profitability because days lost through strike activity are causing damage to our economy. In truth, the number of days per year lost to industrial action has fallen dramatically over the last 30 years and has today reached a historic low.

What’s more, as the new report makes clear, there is evidence to suggest that the bill is likely to have the opposite effect on national prosperity.

 

Diminishing collective voice and the declining wage-share

The research explored the impact of unionisation on wages and growth rates across Europe over the last 30 years and found that overall, declining union density has had a negative effect on national income growth. In other words, the weakening of trade unions has slowed down our economy.

The reason for this is based largely on the fact that wages and salaries are not just a cost for employers, but also represent demand in an economy. The assumption that increasing wages means cutting into profits might be true for an individual firm - ignoring the productivity boosts resulting from pay increases - but for the national economy, higher wages create bigger markets and can therefore increase national income.

What is critical here it to determine which of these effects outweighs the other, by answering the question of whether an economy is “profit-led”, meaning wages as costs dominate, or “wage-led”, where the benefits of higher wages are stronger. This is done by measuring the cost of rising wages against the level of market expansion, on a country by country basis. When we explored our own economy, our research shows that the UK is a wage-led economy: growth is driven more by wages than company profits.

So, what are the implications of this for trade unions and for the government’s bill? The slide in union membership levels, from half of the UK’s working population in the 1970s to around a quarter today, is a major cause of wages giving way to company profits. The fact that fewer people are in unions has contributed to the drop in the wage share of national income from 76% in 1976 to 67% today.

There are of course several other factors that have contributed to the falling wage share. Globalisation and technological change have boosted profits – though by how much is a contested question. A more significant driver is our increasingly financialised economy –meaning that we produce and export less in the UK than we used to, but spend more time trading in financial markets – profits from which don’t translate into wages.

Taking account of these other factors, empirical evidence shows an effect that is statistically significant between the declining collective voice of the workforce and the shrinking slice of the national income pie that workers receive through wages.Based on this we can estimate that the decline in union density over the last four decades has, through it’s effect on the wage share, reduced GDP by £27.2bn at current rates. This is a significant loss – and contradicts claims that loading further restrictions onto union activity would be economically beneficial.

 

Counter-productive attacks on the workforce

Since the 1980s the labour market and workplace have changed beyond recognition, and in ways that mean employees are now less able to speak collectively. Staff are more isolated, often split across different types of contracts, workplaces, even countries.

This has weakened employees’ negotiating positions on wages and conditions, even when collective bargaining and union activities take place. These challenges require more support to the workforce, not an assault on their rights and protections. In August, even a watchdog made up mostly of business representatives tasked with scrutanising governement proposals – the Regulatory Policy Committee (RPC) – deemed the Trade Union Bill ‘not fit for purpose’. This was in part down to the inadequate assessment of the costs and disruption caused by particular elements of the proposed legislation, as well as their overall impact on the economy.

The RPC’s damning review added to the long list of criticisms directed at the bill. From human rights organisations noting the infringement to the right of working people to withhold their labour, to the objections from Conservative MP and former Shadow Home Secretary David Davis on the grounds that it would encroach on civil liberties.

These arguments have been well made, but now we have another more direct case: that the Bill’s rationale is faulty and costly – it runs counter to the government’s stated economic aim of making Britain prosper.

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Alice Martin, Researcher, New Economics Foundation (NEF)

The launch of ‘Working for the economy: the economic case for trade unions’ will take place on Tuesday 27 October, between 17:00-19:00 at the University of Greenwich, Room QA180, Old Royal  Naval College, Park Row, London, SE10 9LS and will be followed by a drinks reception.

This is a free event but space is limited, please register here

Speakers:

• Owen Smith MP, Shadow Secretary of State for Work and Pensions
• Prof Ozlem Onaran, University of Greenwich Political Economy Research Centre
• Alice Martin, New Economics Foundation, Researcher
• Mike Clancy, General Secretary, Prospect
• Jo Galloway, Unison, Area Organiser, UNISON Greater London Region
• Dr Amanda Sackur, UCU, Regional Support Official
• Andy Prendergast, Senior Organiser, GMB