Mr Medlock and the Classics: Part IV

Full employment go brrr!

Having said “welfare over work”, it is worth recognising that full employment is nonetheless a crucial part of any social democracy. Not only does it makes pushing for things like leisure or the environment easier, it remains one of the most important aspects of the lives of the working population. Unemployment is painful, causing psychological and physiological harms as well as having long-term scarring effects on earning potential. And even underemployment is bad, because it often comes with limited bargaining power and poor workers’ rights. So full employment is a goal that is worth working towards. And as part of getting there, it is important to have equal pay for equal work - that is, to reproduce the characteristics of a perfectly competitive labour market, which do not simply appear when labour markets are deregulated and decentralised.

One of the main ways of getting to these goals is via sectoral bargaining - this is where unions collectively bargain for standards across an entire industry, rather than just within a particular enterprise. One reason unions have become scarcer in the USA is due to the incentive for insiders to exclude new entrants, the incentive for firms to discourage workers from joining unions and the slower growth of firms with unions. A sectoral-level union would not face these issues - in fact, it would allow unions to be more effective, since they could take advantage of a level of interfirm coordination that is currently prohibited as well as benefit from the economies of scale that mean bargaining is less of a strain on union resources. The benefits they provide, like increased wages, would generate further support for unions. And although there may be problems of free-riding, this could be mitigated by the union providing other services - in the most extreme case, this looks like the Ghent system where unions provide unemployment insurance.

In general, unions can solve a Hayekian informational problem, as they are uniquely placed to advocate for and provide support to workers as well as pushing for a more democratic society where workers are listened to. Furthermore, the sense of unity and solidarity they provide is helpful in reducing racial resentment. And they can internalise externalities. They also help equalise access to unemployment insurance, making sure that one’s race and educational level doesn’t affect one’s ability to access these benefits.

But there are benefits to having sectoral unions in particular, as opposed to enterprise-level ones. For one, it means we are no longer dependent on a single statutory minimum wage, as each sector will have its own via negotiation. This is beneficial not only in reducing the political capital required to improve material living standards, but also in providing flexibility for sectoral disparities, since the appropriate statutory minimum wage will never be high enough to counteract monopsony power in higher-paying industries.

This can also act as a form of industrial policy - by compressing the wage distribution and leading to higher wages via more worker power, it forces unproductive firms out in a way that simply raising the minimum wage fails to do. This is buttressed by the fact that it allows sectoral training programs to be created, bypassing the prisoner’s dilemma that currently exists, where worker turnover disincentivises individual firms from upskilling their employees. It also makes workers more productive via the efficiency wage theory. And it does so without leading to increases in unemployment within these productive firms, because the workers have become more efficient. Nor does this faster process of creative destruction necessarily hurt smaller firms - in fact, smaller firms in Spain actually wanted to keep sectoral bargaining, due to their higher wage-bargaining costs without sectoral unions.

Furthermore, it is worth realising that a firm-level wage-bargaining system will reward assertive individuals - insofar as women are punished for displaying assertiveness, this can lead to sexist outcomes. A system that takes wage-setting beyond a firm level will mitigate the extent to which discriminatory bosses can discriminate by ensuring that wages are set by rules over discretion. So sectoral bargaining can reduce the gender wage gap. The unsurprising result of efficient workers, productive firms, training schemes and an inclusive workforce is that sectoral bargaining is associated with higher employment rates and lower unemployment rates. We also see that it results in labour markets that are much more favourable towards traditional “outsiders” like young workers, female workers and low-skilled workers.

We can get even more gains in productivity and wage compression if we have cross-sector coordination, where different sectoral unions cooperate in their plans. The reason these benefits occur is because of the fact that competitive wage premia can slow growth - that is, sunrise industries need to pay higher wages than those paid by existing industries due to the frictions in labour adjustment. The consequence is that these new industries will be disadvantaged. This cross-sectoral coordination can compress this wage differential, which is what happened in Sweden. The result of this equalisation of wages within sector and compression of wages between sectors is that of more aggregate output and productivity.

Although some worry that this could lead to increased employer concentration within a sector, this can be mitigated by other policies like anti-trust regulation etc. Equally, the danger of higher profits due to wage compression is simply an opportunity for that to be taxed. And although there might be a reduced incentive to train up one’s human capital due to the smaller skill premia, this can be mitigated with active labour market policies. A final concern relates to too much union power- this is possible, though not really a concern right now. But more importantly, strong unions don’t always slow down changes - in fact, the security and collective action they provide can aid in sectoral transitions. As such, the case for sectoral bargaining is strong and its downsides are limited, suggesting we should start on that path by establishing wage boards.

While sectoral bargaining can provide sector-level worker power, there are often idiosyncratic elements to each individual firm. That’s where co-determination comes into play - this is where workers have some level of power and involvement in a firm’s board of directors. This can allow the voices of workers to be heard and reduce corporate myopia. It can improve the efficiency of labour investment decisions, resulting in higher profits. And more broadly, this sort of participatory workplace makes workers more sceptical of authoritarianism and more politically engaged. Indeed, you see many of these effects replicated with employee ownership too.

Now all of this means that workers have a great deal of influence - but part of what was discussed above involves the continuous culling of unproductive firms. That means we need a way to support workers who get laid off as a result. We can do that in two ways: by unemployment insurance to support them during periods of transition and by active labour market policies that get that back into work quicker. Unemployment insurance ensures that the adverse health effects of job loss are mitigated. It also helps employer-employee matching, since the unemployed don’t need to immediately find another job. In fact, to the extent to which there may be an increased unemployment duration from unemployment insurance, this comes more from these beneficial liquidity effects rather than the detrimental substitution effect between leisure and work.

Indeed, we can look at how people reacted to the CARES Act to see if generous unemployment insurance will lead to people not working, which was argued by some at the time. The fact of the matter is that workers understand there is a net present value to having a job, even if their salary is less than the UI money. This is not to mention the very real non-pecuniary costs of being unemployed. Consequently, it is no surprise that the Pandemic UI was actually very successful, with no adverse employment effects and with reductions in poverty.

As for active labour market policies, these are needed because some jobs will and should be destroyed over time. Indeed, the job satisfaction on many of the most automatable jobs is low, so it would be no bad thing if people did not have to do them. There are a plethora of possible ALMPs, like work complements, job placement services, training schemes and public works programs - indeed, the last of the four can be a way of helping in the climate change transition to greener jobs. And with sectoral unions, this can be organised and funded by them, providing what Gösta Rehn described as “security by wings”.

The result of all of this is a labour market where workers have a meaningful voice, where they get support if they are out of work and where they receive training to get back into work. That allows us to have continuous competitive pressure on firms without workers being harmedin the process of transition. And not only is this something workers want, it actively improves the economy as a whole. Perhaps the best demonstration of this is by looking at how some of the most vulnerable workers, i.e. those long-term illnesses, fare much better under this system than one with lots of deregulation.

All of this isn’t to say that more blunt instruments like minimum wage increases are bad. In fact, I have an old post summarising the possible benefits of a minimum wage. We can see that they remain a useful part of the toolkit where these wider reforms cannot be achieved, by helping combat monopsony power with a minimal effect on employment.