Kenneth Rogoff: Resurgent Unions and the Global Economy

Kenneth Rogoff says that if unions gain more power in rich countries like the U.S., as they appear to be doing, they are likely to be "a major destabilising force in trade and growth":

Resurgent unions and the global economy, by Kenneth Rogoff, Project Syndicate: Will the political resurgence of labour unions throw a wrench into the wheels of globalisation? Or will their growing strength serve to make globalisation more sustainable by fostering greater equality and fairness? One way or the other, unions stand as a major wild card for the evolution of our economic system...

Unions’ rising influence is evident in many recent events: German Chancellor Angela Merkel’s controversial deal to raise minimum wages for postal employees; several US presidential candidates’ open misgivings about trade and immigration; and the Chinese leadership’s nascent concerns about labour standards.

Along with their political clout, unions’ intellectual respectability is also experiencing a renaissance. After decades of vilification by economists for raising unemployment and strangling growth, the union movement is now receiving backing from thought leaders such as Paul Krugman, who argues stronger unions are needed to counter globalisation’s worst excesses. ...

Today, US political leaders such as Congressman Barney Frank want to bring back unions. But there is good reason to be sceptical. For a relatively poor country such as China, real unions could help balance employers’ power, bringing quality-of-life benefits that outweigh the growth costs.

But, for the US and rich countries in Europe, the argument that stronger unions would bring more benefits than costs is far more dubious.

Nowadays, most workers already have legal and statutory rights that cover the basic protections that unions originally fought for a century ago. Instead, union influence today all too often serves to promulgate inflexible work practices and flat salary structures that do not adequately reward work effort and skill.

Some of the issues that unions are promoting, such as human rights and environmental quality, are unassailable. When they try to connect these issues with trade, however, their motives become questionable.

A case in point is union lobbying against the US-Colombia free-trade agreement, ratification of which would greatly advance US-Latin American relations. ...[A]nti-pact activists have complained that Colombia is anti-union because it does not protect union members from rebel violence. Yet the Colombian government notes that all Colombians suffer from rebel violence — union members actually experience less of it than the rest of the population.

Unfortunately, this play is being re-enacted across a host of trade issues, including many involving China.

For rich countries, income redistribution is much better handled through taxes and benefits system, rather than by government edicts to strengthen unions. The rich today pay so little in taxes in many countries that it would be a big improvement simply to move to a flat tax, with a very high exemption level so that lower-income families pay nothing.

For middle-income countries, it is a tougher call. But here, too, increasing workers’ legal and statutory rights, while allowing most unions to fade away, seems like the right approach.

Unfortunately, we are far more likely to see unions’ growing political influence become a major destabilising force in trade and growth, with highly uncertain consequences. When we see political leaders in many rich countries pander to unions by bashing each other on free trade and immigration, there is every reason to worry about trouble ahead. ...

From the archives:

The union question is a hard one for me. I don't believe that the degree of market power workers and firms bring to the bargaining table is in balance. "Superstars" at the upper end of the income distribution have too much market power, and firms have too much market power at the lower end of the income distribution, where the lower end starts at fairly high levels of income.

Unions are one potential answer for workers at the lower end of the income distribution, but is a return to unions the best solution to the market power imbalance? Should we return to the past, or should we try to use the changing political landscape as an opportunity to build better institutions for both workers and firms, institutions that offer workers the same degree of bargaining power that unions provide, and the the same degree of income, health, and retirement security, but do so more efficiently? We already know how unions work, pretty much, but can we do better?

A proposal to implement novel policy has no chance of surviving the political process even if it is well-grounded in economic fundamentals, and even if it looks to be a clear improvement over unionization for everyone involved. There is legislation to change union membership rules under debate in Congress, but the current political battle is about getting people on record for the next presidential election rather than a serious hope of changing the rules on union membership drives. If the next presidential election goes according to plan, then there might be a chance for change, but even then unions may be (and probably will be) the only viable solution within the political process.