Unions In A Global Labor Market

Countries are becoming increasingly interconnected by economic forces, particularly through greater openness to international trade and rapidly rising — though also often falling — capital flows. Movement of workers across national boundaries is generally growing more slowly than flows of goods and capital, owing to restrictions by the primarily richer countries receiving migrants. Workers in any country, however, are indirectly connected to other workers through the effects of increased integration of trade and capital. For instance, toys can be produced more cheaply in China than in the United States or France. This makes it generally unprofitable to have toy factories employing workers in these richer countries (except for upscale toys); it also means American and French workers can enjoy the benefits of lower price toys. Similarly, capital can effectively move between different groups of workers — from the United States to Mexico, from Germany to Hungary or, for that matter, from Korea to the United Kingdom.

It is easy to overstate the effects of these flows, including the threat that cheap labor poses to workers in richer countries. Richer countries have much higher levels of capital per worker, more highly articulated economies, more productive infrastructure and, of course, more skilled and productive workers. And as their incomes rises, more and more workers are employed in the service sectors, not in the production of goods directly competing with foreign products. But rising international integration is a reality, as is increasing openness at a country level.

A particular dimension of the current phase of integration is the insertion into the global labor market of very large groups of workers, such as the relatively large number of Chinese and South Asian workers who are entering world production as a consequence of the opening up of their economies in past ten years or so, and who are close to the bottom of the international wage ladder. Around the middle of wage distribution, but at relatively high-skill levels, are the significant number of workers from the former Soviet Union (Eastern Europe and Central Asia). These enormous movements are bound to cause large ripple effects around the world.

While the main focus of this note is on unions, it is important to briefly consider the question of whether this increasing integration is beneficial or not. The answer is complex. It depends in a fairly systematic way on policies, capabilities and institutions. This can be illustrated by historical experience. Whatever the interpretation of why most of East Asia grew so fast for so long — notwithstanding the financial turmoil of the late 1990s — it is clear that a process of increasing international engagement was an important component — in China, Indonesia, Korea, Malaysia, Singapore, Thailand and, more recently, Vietnam. Peasants and workers in these countries enjoyed very large gains in labor incomes and in overall well-being from the process. It is equally true that global economic progress has excluded the bulk of farmers and workers in Sub-Saharan Africa. In Latin America and in the Middle East and North Africa, integration led to a roller coaster effect, with great advances in some periods and major setbacks in others. Globalization, in the sense of increasing trade and capital flows and associated liberalization, is neither a guarantee of progress nor of regression.

Where countries have pursued sound overall policies (including prudent macropolicies and a reasonable balance between rural and urban areas) and effective investment strategies (particularly in economic infrastructure and social services) and, in addition, have reasonably effective governmental and non-governmental institutions (including informal networks and social patterns of behavior, now often termed "social capital"), then the increased opportunities from globalization generally get translated into rising national prosperity and participation in that prosperity by the bulk of workers, formal and informal, urban and rural. Where countries do not meet these conditions, then they — or groups within them — are likely to be left behind. Moreover, increased openness can lead to heightened risks: Capital flows in particular tend to reward success generously and punish mistakes harshly.

Do unions have a role in the global labor market? Will they become an anachronism, a feature of the 20th century, but not of the 21st? I would argue that this is not the case. There is, however, an element of truth in the story of unionism’s decline. At the risk of caricature, the argument goes something along the following lines: Unions bring benefits to their members through their monopoly power — by extracting special benefits from societies through the wielding of this power. This can temporarily be at the expense of profits, but capital can move to other sectors, or to other countries.

Unions are, therefore, only likely to sustain the relatively privileged position of their members if they are in activities that are protected from competition. In fact, they have been particularly associated with somewhat protected sectors (including the public sector) in seemingly dualistic economies. It is precisely these sectors that are changing through the forces of increasing openness and privatization, which is in turn often driven by pressures for heightened productivity in previously monopolistic activities, such as electricity or transport production. It is not then surprising that unions have often been strongly resistant to reforms that are necessary to longer-term restructuring of inefficient economic structures, but that are crucial for future growth in jobs and incomes. These forces are real. In some countries — New Zealand, the United Kingdom, the United States — union membership has experienced significant declines.

This sketch is, however, quite inadequate as an account of the functioning and dynamics of unions — even as a caricature. Unions have multiple roles and effects. Under some conditions, they can push up their workers’ wages. In fact, there is an extensive literature on the union wage premium, and plenty of specific examples of unions managing to extract special deals, such as wage hikes for coal miners in India before elections. Unions can also play an important role in: a) potentially raising productivity; b) helping reduce discrimination between men and women, and between ethnic groups; c) monitoring health, safety and other working conditions; and d) protecting against abuse or victimization of individuals.

Unions have also a long history of building worker solidarity — which has personal benefits and may indirectly lead to productivity gains, i.e., be a form of social capital — as well as of promoting wider action to advance social justice in the broader polity. Moreover, it is not at all clear that the global trend is for declines in union membership. Declines are primarily concentrated in industrial countries — where they in part reflect the diminishing role of manufacturing — or in countries where unionism has been important in extensive public sectors that are now contracting or privatizing — which is essentially a necessary one-time change for long-run growth in wages and employment. It is therefore quite possible that in many countries unions will grow rather than decline in importance.

There are two interrelated questions dealing with the future of unions: Why might they grow in membership in the face of international competition, and what are the conditions in which their potentially beneficial effects would outweigh their potentially negative effects? With respect to the latter, the primary role and potential benefits of unions lie in the workplace, which is where they are most likely to have the information and understanding of factors that will raise productivity, prevent abuse and ensure decent working conditions. Moreover, if the primary locus of bargaining is at the level of the plant or firm, it is more likely that collective agreements will pay close attention to their consequences for the firm’s competitiveness, since otherwise the employment of the workers will be at stake. However, this is only the case if the firm faces a competitive market. This is why the classic cases of dualistic structures — with small, relatively privileged unionized insiders — tend to be in protected industrial sectors (as in India and Bangladesh), or in some public sectors (as in Francophone Africa, for example, at least before the devaluation of the CFA Franc, and in much of the Middle East and North Africa, at least before oil prices declined).

A competitive product market, together with a competitive overall labor market — that is, with a competing non-unionized sector — are both conducive to unions playing an efficiency and welfare-enhancing role rather than a monopolistic one. These roles are more likely to be fostered in an increasingly integrated global market. (That is not to say that unions do not have other roles, including a political role, on the national stage, but they are generally separated from their decentralized bargaining function.)

Whatever the context, political rights for the establishment of independent unions — which in principle should neither encourage nor discourage it — must be present. This is more commonly absent than present in the developing world. With important exceptions (notably South Asia, albeit with the problems noted above), independent unionism is more often restricted, and frequently highly linked to state patronage. Not only does this limit the rights of workers, but it encourages a brand of unionism that is oriented more towards getting favors and influence from a state apparatus — which is all too frequently either authoritarian, corrupt or both — than to improving workplace productivity and conditions. In many if not most countries, a more neutral playing field for unionism means strengthening the rights of workers to organize and form independent unions. This, together with the increasing importance of industry in many countries (for which formal unions are particularly suited), is why there is the potential for beneficial growth in union membership in the world, and this potential is consistent with a competitive and increasingly global labor market. Unionism will undoubtedly change in character — perhaps less male dominated, and less oriented to influencing the state in some countries — but that will be for the good.

Unions constitute only one aspect of a complex series of determinants defining the effects on workers of recent international and domestic developments. More broadly, such effects will depend on four main factors: 1) overall opportunities faced by a country; 2) workers’ capabilities; 3) investment levels; and 4) the type of institutions in place with influence on the workplace and on the security of workers and their households.

Globalization expands opportunities. Whether these are translated into benefits for workers — in terms of higher income and reasonable working conditions and security — depends crucially on the other three factors. While workers’ capabilities are to a large extent a function of education and training systems — and of past working experience — investment levels depend on the overall macroeconomic and business environment and on domestic entrepreneurial skills. Finally, institutions are crucial, particularly labor market and social security structures that foster decent work conditions and income security without undermining productivity.

Unions form one component of this broader institutional picture, and play a valuable role. This role is however most likely to produce lasting gains in an environment that encourages their role in increasing productivity gains, in ensuring fairness and in protecting reasonable working conditions.

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