Consequences of trade for labor markets and the employment relationship

consequences of trade for labor markets and the employment relationship

We analyze the labor market consequences of international trade, using the . unemployment, a decrease in manufacturing employment and a decrease in non - These relationships are formally examined with an econometric approach in. Although these facts have important consequences for labor market outcomes, the also neglects: employment relationships are hardly ever spot market .. Instead of trading physical products, the employer and the worker simply exchange. into the potential consequences, in particular in terms of labour market outcomes broader view to investigate the link between trade and employment in Germany To investigate the relationship between trade and individuals' wages we.

Also, despite its current popularity as a potential model for other countries and its use as a benchmark, the Nordic model has not always been alluring. It will be recalled that the Nordic countries had their financial crisis in the s. There are also material differences between the individual Nordic states.

Thus, Sweden and Denmark have seen the emergence of more decentralized regimes based on more flexible wage structures than before, as well as a reordering of economic priorities. This restructuring has received insufficient attention in the economics literature.

Finally, the Nordic countries are characterized by highly institutionalized social dialogues between the labor market organizations and public representatives at all levels. This privileged position of the unions in relation to public policy making and its implementation sharply differentiates this distinct bloc from most other nations. Collective bargaining and microeconomic performance From the perspective of micro theory, union decline again poses a mix of positive and negative elements.

The conventional monopoly theory of unions sees their effects as unabashedly negative. Viewed as combinations in restraint of trade, unions introduce distortions into what would otherwise be efficient labor markets.

They distort labor market outcomes owing to the increase in compensation above competitive levels, and they impose deadweight losses. To these losses in welfare, it is conventional to add the output costs stemming from the union rule-book and reduced management discretion.

But there is a countervailing face of unions that emphasizes their value-enhancing effects. The chief exponents of this collective voice view of unionism note the ambiguity introduced by long-term attachments between the firm and much of its labor force for the efficiency properties of the standard quit or exit mechanism [4]. As a result, voice or direct communication between the worker and the firm fulfils the role of bringing actual and desired conditions closer together.

Crucial to this argument is that many working conditions are public goods, with the implication that they will be underprovided without some form of collective agency, at all times equated in this model with autonomous unions. More generally, the collective voice model emphasizes the great importance of the quality of labor relations.

Good labor relations are typically viewed as more likely to produce positive performance outcomes, and vice versa. Finally, the model also recognizes the shock that unions and union wages can impart to inefficient management, providing it with the incentive to tighten up on work standards and alter methods of production. Thus, there are a number of largely informational channels through which unionism as the instrument of collective voice can improve the operation of the workplace, their most tangible manifestation being a reduction in quits, all things being equal.

But there is also the issue of governance. Assuming that unions make it easier less costly to negotiate and administer a governance apparatus, they may be expected to facilitate long-term efficient contracting in a number of ways.

Thus, a union specializing in information about the contract and in the representation of workers can prevent employers from behaving opportunistically. Empirical evidence for the US, surveyed in an influential review, does not encourage a sanguine view of this modern perspective of unionism [5]. First, as far as the keynote productivity variable is concerned, union effects are close to zero on average, and at most modestly positive. Second, unions have little direct effect on productivity growth; the lower growth of union firms, after controlling for union—non-union differences in capital and other factors of production, is the consequence of their being located in slower-growing sectors but see below.

consequences of trade for labor markets and the employment relationship

Third, the findings with respect to profitability are of concern. In one sense, a negative profitability effect is to be expected, given a substantial union wage premium in conjunction with a close-to-zero productivity effect.

And virtually all US studies point to lower profitability in union regimes, irrespective of the profit measure used. At issue, however, is the source of the union gain. If the process is merely a redistributive effect, there are no implications for efficiency.

consequences of trade for labor markets and the employment relationship

But there is little to suggest that concentration-related profits are an important source of the gain. Fourth, even greater concern is occasioned by union effects on investments in tangible i. Firms rationally seek to limit their exposure to this hold-up problem, most obviously by cutting back on these investments.

There are both direct and indirect union effects: The former are caused by the union wage tax, while the latter stem from the reduction in profits relevant because of imperfect capital markets. Finally, lower profits and investment are manifested in lower employment growth, although infrequently in higher failure rates. In a rare departure from these pessimistic findings, one US study examining the effects on labor productivity of various working practices, information technology, and management procedures in conjunction with unionism offers a brighter scenario [6].

By contrast, the corresponding differential for a high-performance non-union plant is put at only 4. To what extent do the negative US results carry over to other countries? After all, most studies confirm that the US union premium is unusually high compared with that in other countries. Cross-country surveys do in fact often report different results for other countries.

In particular, the innovation results and to a lesser extent the profit results are generally not found for other nations. Given that the data in these studies are rather dated, however, this section can be concluded with some updated results for Britain and Germany, along with some brief remarks on the possible variation in performance across different unionized settings.

The British case is interesting because of the shift in the impact of British unions in the s and beyond compared with the s.

It provides clear evidence of a diminution in the negative effects of unions on wages, financial performance and productivity through time. By the same token, certain other unfavorable effects of unions are shown to persist, including slower employment growth and elevated absenteeism.

  • Low wages and job insecurity as a destructive global standard

After US and British research, union and worker representation effects on performance have perhaps been most studied for Germany. Research has focused more on works council than union effect, although recently the two have been examined together appropriately so, given the dual system of industrial relations in that country, with collective bargaining typically being conducted at industry level and worker representation at plant level through the agency of works councils.

German works councils are the exemplars of collective voice, given their statutory rights to information, consultation, and codetermination and constraints they cannot bargain about terms usually fixed under collective agreements at industry level, and they cannot engage in strike action. But the breadth of their authority inevitably conveys power, and how this is exercised will determine their effects on performance. Again, theory does not provide an unambiguous answer.

Recent studies exploiting large nationally representative data sets often present a more optimistic picture than the earlier literature. Thus, there is some indication that the effect of works councils on firm productivity and even innovation may be positive if the entity is firmly embedded in the dual system i. However, with the pronounced decline in unionism, German sectoral collective bargaining has significantly decentralized, and works councils have come to enjoy formal bargaining rights.

The jury is still out as to whether the new bargaining role of works councils has been manifested in more active rent-seeking. In these circumstances, ambitious policy recommendations for other nations to adopt this institution may be especially premature. Finally, as a wide-ranging British study indicated some time ago, high-performance practices are not distinctive with respect to unionism [8].

Further, the subsequent literature cannot be said to have uncovered a well-determined hierarchy for firm performance or a blueprint for the future of unions because of the ambiguity surrounding the costs of the practices in question, as well as profound causality issues associated with the unobserved timing of these transforming industrial relations practices. The earnings distribution and worker voice Their redistributive function has sometimes led to unions being described as a sword of justice.

Also, apart from the issue of industrial democracy, workers possess valuable private information that is more likely to be disclosed under collective action. Might not the decline in unionism therefore have worrisome implications for inequality and worker voice?

The definitive modern comparative study investigating unions and wage inequality in the US, the UK, and Canada from the early s to reaches three main conclusions [9]. First, unions tend to reduce inequality in all three countries among male workers, whose union coverage tends to be concentrated in the middle of the skill distribution and whose wages tend to be compressed relative to those of non-union workers.

Second, unions do not reduce wage inequality among females because a women, unlike men, are concentrated in the upper end of the wage distribution and b the union wage premium is not only greater for women but also greater for higher-skilled women.

Finally, the decline in union density and the wage differential has resulted in a steady decline in the equalizing effect of unions for males but had little effect for females. If the size of the union sector and the absence of extension mechanisms in these three countries make it much easier it to compare the structure of wages for workers whose wages are determined by union contracts and those whose wages are not, other studies have nevertheless confirmed the same basic tendencies.

Thus, for example, a very recent comparative study of Organisation for Economic Co-operation and Development OECD nations confirms that over the interval — countries witnessing relatively large declines in unionization also experienced relatively large increases in earnings inequality, as measured by changes in the Afterhowever, no such association is evident in the data.

The consequences of trade union power erosion

This divergence provides the starting-point for an examination of the link between changes in redistribution measured by the percentage change in the Gini coefficient produced by taxation and income transfers and changes in union density. A regression of the change in redistribution on the change in union density indicates a positive and statistically significant effect of unionism for the sample period — During this period, increasing unionism seems to have exerted pressure on governments to redistribute, and vice versa.

For the interval —, however, the coefficient estimate for the change in union density is negative and statistically insignificant, suggesting that changes in union density were no longer linked to redistribution. This is becoming even more important as, at global level, economic power relations are pushing workers more and more in the direction of job insecurity. Many may not yet be in a situation that qualifies as precarious, but they face a near future of increasingly insecure, unstable, unprotected and low-paid work.

Many commentators argue that economic globalization is one of the drivers behind changing employment relations, one trend in which is the increase in precarious work and another is job polarization.

In other cases, workers had to move to jobs in the non-tradable service sector, where not only is the pay lower, but the work is generally irregular, unstable and insecure. However, most firm relocations are to developing countries and exert downward pressure on wages and working conditions. This means that firms that find it easier to relocate to regions with lower labour costs have an advantage in bargaining with trade unions on lower wages for the remaining workers and use this situation to change the relationship between employer and employee.

Although most research comes from the US, however, there is a substantial body of evidence showing that foreign competition from low-wage economies can displace low- and medium-skilled workers in all advanced economies, particularly those performing high routine tasks with a low service component and that require little abstract thinking.

consequences of trade for labor markets and the employment relationship

Even in export economies like Germany, for example, a large percentage of the workforce in the manufacturing sector is engaged in precarious work, specifically temporary and agency work, which can at least partly be accounted for by increasing international competition. The impact of financialization on insecure work and low wages One specific aspect of economic globalization is the financialization of the economy. Due to financial liberalization, financialization is a global trend without borders, where money is moved from one country to another.

Rather than being invested in productive sectors or in human capital, profits have been used to get the highest profit for investors and shareholders, mainly in speculative capital markets. To achieve higher profits, labour costs had to be kept as low as possible, which impacted not only on wage levels, but also on the formal relationship between employer and employee.

It was better to subcontract work, which would make it more flexible, create more temporary, unprotected and insecure jobs within a triangular relationship, where employment agencies mediate between employers and employees.

Furthermore, in the debate on the rise of self-employment in the countries of the European Union, it is increasingly argued that self-employment is both low paid and highly insecure. Most self-employed people do not have enough work to work full-time. Self-employment has less to do with creativity and entrepreneurship and more with precarious work; it is better to have at least some income rather than nothing and being dependent on social benefits.

As such unemployment is declining, but precarious work is on the rise, hidden in rising self-employment figures. On the other hand, senior positions, management and more creative jobs are seen as investments in quality.

Not all these jobs in the top segments are based on permanent contracts, but even if they are subcontracted, the pay remains significantly higher.

Financialization therefore generates not only an increase in income inequality, but also a strong push towards precarious work for workers who cannot compete at a higher level. Indeed, while the formation of a global financial class could be described as a new integrating and collectivizing element in the global economy, the shadow side is the emergence of a global precarious work society.

Insecure and flexible work, for example, pushes up mental health and security costs.

consequences of trade for labor markets and the employment relationship

In the US, for example, according to economist David Autor, the costs of all kind of benefits outpace the benefits of cheaper imports due to free trade. There is increasing evidence suggesting a link between precarious work and income inequality.

Significantly, wage differentials between workers with a permanent contract and those with unstable and temporary contracts are particularly high in OECD countries among low earners, while earnings remain almost the same among high earners.

The link between precarious work and rising income inequality ties in with the current hot debate on inequality. For a long time, income inequality was not an important topic in economics and politics.

There was widespread optimism that competitive markets would generate a trickle-down effect 44 as a result of economic growth. Inequality is now seen as a problem that cannot be addressed by the market alone. High income inequality is recognized, also by economists at the World Bank and IMF, as a major threat to future well-being and sustainable economic growth that cannot be solved by the trickle-down effect.

Labor Markets and Minimum Wage: Crash Course Economics #28

Berg and Jonathan D. Ostry, for example, found that inequality leads not to sustainable economic growth but interrupted growth of a relatively short duration. It is safe to conclude that there is now a growing consensus that assessments of economic performance should not focus solely on overall income growth, but also take account of income distribution. And arguably, this pushes precarious work higher up the political agenda. The role of trade unions in securing growth This is where trade unions step in.

The weakening of the labour movement in the last quarter of that century has had a significant impact on the ability of working people to influence their standard of living and quality of life. The link between inequality and the power of trade unions has been analyzed in many ways, and there appears to be a clear correlation between the increase and decrease in trade union power and the fall and rise of inequality within nations see figure 5.

There is broad consensus in qualitative and quantitative international research that increases in inequality have been associated with declining unionization rates in developed and developing countries alike. However, it seems safe to conclude that the declining bargaining power of workers has also impacted negatively on job security, labour protection and permanent contracting. One of the main causes of these problems is that powerful corporations have been able to successfully lobby for economic policies that reflect their interests, especially tax cuts for the rich which have contributed to rising inequality.

How can this be achieved? Different approaches have been suggested over time to find a balance between a competitive and dynamic labour market and continued job security and protection for workers. One such approach has been pushed by trade unions working globally.

These global union federations actively negotiate Global Framework Agreements GFA with transnational companies, based on voluntary compliance and enforcement. InVolkswagen signed an agreement limiting temporary work at their plants and setting principles for the use of temporary contracts in the entire Volkswagen Group worldwide.

Reportedly, since the s, fewer workers have joined or continued their membership with trade unions, according to the ILO an indication of an increase in global insecurity and inequality. Corporations that largely rely on subcontractors should be urged to take steps to decrease this rate of flexibility and make no distinction between employees and subcontracted workers.

This could can be achieved through negotiations with global or local trade unions, but can also be encouraged by governments. However, as UK think tank the Policy Network finds, traditional social protection systems are often poorly equipped to negotiate such demands following the structural changes in labour markets.

First of all, there must be a legal framework regulating the relationship between employers and employees.

Globalization and the Labor Market

Governments should encourage companies to take steps to improve the contracting of workers, with a minimum level of flexible work hours, differentiated by sector.

It is therefore important that the bargaining power of workers improves. Trade unions should be empowered to act, especially on a global scale, to deal directly in negotiations with international corporations. What this paper aims to add to this debate is that the broader global economic context must be included in measures to combat insecure work.

Measures on wage-led growth, inclusive growth, redefining the ownership of capital, and regulating the financial sector must be all part of an effort to rebalance the economy in favour of creating more secure jobs. This is not only the domain of labour market policy. Job insecurity and low wages should therefore not be the sole domain of labour economics and policy. Reversing the vicious cycle of mutually reinforcing elements of the current globalization regime, in which precarious employment is a key element, will require a comprehensive set of policy responses that reach far beyond labour market policies.

Monetary, fiscal, financial, social, economic, labour, gender and environmental policies need to be geared towards reducing inequality, strengthening democracy in the workplace, and providing income security, good working conditions and employment opportunities. For example, an alternative trade regime should be designed that gives governments more tools to increase job opportunities and encourage investment in productive sectors rather than for speculative purposes.