Declining union power would not be an
overwhelming cause for concern if not for rising wage inequality and the
loss of worker voice
The micro- and macroeconomic effects of the
declining power of trade unions have been hotly debated by economists and
policymakers. Nevertheless, the empirical evidence shows that the impact of
the decline on economic aggregates and firm performance is not an
overwhelming cause for concern. However, the association of declining union
power with rising earnings inequality and a loss of direct communication
between workers and firms is potentially more worrisome. This in turn raises
the questions of how supportive contemporary unionism is of wage solidarity,
and whether the depiction of the nonunion workplace as an authoritarian
“bleak house” is more caricature than reality.
Labor market regulation should aim to improve the
functioning of the labor market while protecting workers
Governments regulate employment to protect
workers and to improve labor market efficiency. However, employment
regulations can be controversial, often complicated by opposing ideological
views. Thus, it is important for policymakers in developing countries to
base decisions on empirical evidence of the impacts of these regulations.
The majority of the evidence suggests that most countries have set their
regulations in the appropriate range. But it can be costly when countries
either overregulate or underregulate their labor market.
Two-tier wage bargaining fails to link wages
more closely to productivity and increases allocative inefficiencies
Debate over labor market flexibility focuses
mainly on firing costs, while largely ignoring wage determination and the
need for collective bargaining reform. Most countries affected by the euro
debt crisis have two-tier bargaining structures in which plant-level
bargaining supplements national or industrywide (multi-employer) agreements,
taking the pay agreement established at the multi-employer level as a floor.
Two-tier structures were intended to link pay more closely to productivity
and to allow wages to adjust downward during economic downturns, while
preventing excessive earning dispersion. However, these structures seem to
fail precisely on these grounds.
Comparisons to others’ pay and to one’s own past
earnings can affect willingness to work and effort on the job
Recent studies show that even irrelevant
relative pay information—earnings compared to the past or to
others—significantly affects workers’ willingness to work (labor supply) and
effort. This effect stems mainly from those whose pay compares unfavorably;
accordingly, earning less compared to others or less than in the past
significantly reduces one’s willingness to work and effort exerted on the
job. Comparing favorably, however, has mixed effects—with usually no effect
on effort, but positive or no effects on labor supply. Understanding when
relative pay increases labor supply and effort can thus help firms devise
optimal payment structures.
Policies to tackle wage inequality should focus
on skills alongside reform of labor market institutions
Policymakers in many OECD countries are
increasingly concerned about high and rising inequality. Much of the
evidence (as far back as Adam Smith’s ) points to the importance of skills in tackling wage
inequality. Yet a recent strand of the research argues that (cognitive)
skills explain little of the cross-country differences in wage inequality.
Does this challenge the received wisdom on the relationship between skills
and wage inequality? No, because this recent research fails to account for
the fact that the price of skill (and thus wage inequality) is determined to
a large extent by the match of skill supply and demand.
What are the economic implications of union wage
bargaining for workers, firms, and society?
Despite declining bargaining power, unions
continue to generate a wage premium. Some feel collective bargaining has had
its day. Politicians on both sides of the Atlantic have recently called for
the removal of bargaining rights from workers in the name of wage and
employment flexibility, yet unions often work in tandem with employers for
mutual gain based on productivity growth. If this is where the premium
originates, then firms and workers benefit. Without unions bargaining
successfully to raise worker wages, income inequality would almost certainly
be higher than it is.
Labor productivity is generally seen as bringing
wealth and prosperity; but how does it vary over the business cycle?
Aggregate labor productivity is a central
indicator of an economy’s economic development and a wellspring of living
standards. Somewhat controversially, many macroeconomists see productivity
as a primary driver of fluctuations in economic activity along the business
cycle. In some countries, the cyclical behavior of labor productivity seems
to have changed. In the past 20–30 years, the US has become markedly less
procyclical, while the rest of the OECD has not changed or productivity has
become even more procyclical. Finding a cogent and coherent explanation of
these developments is challenging.
Enhancing the earned income tax credit would do
more to reduce poverty, at less cost, than increasing the minimum wage
Minimum wage increases are not an effective
mechanism for reducing poverty. And there is little causal evidence that
they do so. Most workers who gain from minimum wage increases do not live in
poor (or near-poor) families, while some who do live in poor families lose
their job as a result of such increases. The earned income tax credit is an
effective way to reduce poverty. It raises only the after-tax wage rates of
workers in low- and moderate-income families, its tax credit increases with
the number of dependent children, and evidence shows that it increases labor
force participation and employment in these families.
The size and wage level of the public sector affect overall
employment volatility and the economy
Public sector jobs are created because governments opt to
provide goods and services produced directly by public employees. Governments, however, may
also choose to regulate the size of the public sector in order to stabilize targeted national
employment levels. However, economic research suggests that these effects are uncertain and
critically depend on how public wages are determined. Rigid public sector wages lead to
perverse effects on private employment, while flexible public wages lead to a stabilizing
effect. Public employment also has important productivity and redistributive effects.
Delegating the choice of wage setting to workers
can lead to better outcomes for all involved parties
Economists typically predict that people are
inherently selfish; however, experimental evidence suggests that this is
often not the case. In particular, delegating a choice (such as a wage) to
the performing party may imbue this party with a sense of responsibility,
leading to improved outcomes for both the delegating entity and the
performing party. This strategy can be risky, as some people will still
choose to act in a selfish manner, causing adverse consequences for
productivity and earnings. An important issue to consider is therefore how
to encourage a sense of responsibility in the performing party.