Wednesday 22 June 2022

The economics of unions

With the ongoing rail strikes I wanted to talk about the economics of unions. Why do some jobs have unions that you can join and others don't?

There is a simple answer to this: power.

This might sound surprising coming from an economist, but actually power is an extremely important concept for markets and we implicitly talk about it all the time.

When you hear economists talk about "competitive" markets or an increase need for "competition", the word conjures up images of John McEnroe getting in red in the face over an umpires decision. If you were to describe someone as "competitive", let's be honest here, you are saying they are a bit of a dick. The type of person who throw a monopoly board in the air if they lost.

I do think this another instance of a badly named word in economics. Competition in markets doesn't mean people actually having to be competitive in a sporting sense. All that has to happen is that no firm can have so much influence that they can determine the price alone: they do not have the power. No one can charge really high prices as there is always someone there to undercut that price. This is why we think monopolies, where we have a single producer, are bad. We think they are so bad in fact, that we have an office of fair trading that determines if markets are "competitive" enough. 

Just as there are markets for goods and services, there are also markets for work which we call the labour market. The question as to whether or not the labour market is competitive depends on a simple question: if you lost your job, how easy would it be to find another one? That is, how much power does your employer have over you. 

The reason why this is a problem, is that if an employer has a lot of power, they can give you lower wages then you would have in a competitive market. If there were a single provider of jobs, we would call this situation a monopsony.

If you think about the last time you got a raise at work, it might have been because you threatened to leave or even had an outside offer. But if you have a single employer, say you work for the NHS, how can you get an outside offer?* Unions are an attempt to rebalance this power, between the employer and workers. It is why public sectors has many unions for teachers, nurses and rail workers have unions. 

The slightly annoying thing about this is that public sector pay debates seem to come up time and time again. I would like the UK to follow a policy by economist Pedro Gomez who proposes two rules. 1) That the level of pay in the public sector should be slightly lower than the private sector due to higher job security. 2) That the rate of public sector pay should be the same over time. That is, if the average private sector pay rises by 2%, that public sector pay should increase by 2% too. This means that incentives to join the private sector over the public don't diverge over time. 

Of course you will have some debate about levels of pay in the public sector, if job conditions change or we need more nurses, for example. But talking about levels is a much better way to doit than talking about rates and avoids strikes like we are currently seeing.

Now I am not arguing that all unions and strikes correctly address this balance of power in either direction. But I wanted to highlight the economic justification for them.

What I do find slightly annoying, however, is when people give the helpful advice of "join a union" to any issue arising in the labour market. About 25% of those that are employed are currently in a union. Obviously not everyone who has the option of joining a union, does, but it won't make that figure much higher if everyone who could join a union, did.

Although decline in labour market power is one reason for bad jobs with low wages in high-income countries, it isn't the only. There are all sorts of other reasons these wages have declined such as globalisation and low productivity to name but two. Unions are not panaceas to low pay, but are certainty helpful in rebalances market power in some industries.

*Perhaps one of the most famous unions in the UK are in mining. The reason why the employer had power over workers here was due to the fact that if you lost your job in Durham say, you could not easily move to a Welsh mine. 

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