COLLECTIVE BARGAINING AND RISING INEQUALITIES: IS THE OECD FOLLOWING IN THE IMF’S FOOTSTEPS?

~In a paper published in spring 2015, the IMF’s research department made the case for trade unions and collective bargaining as a powerful tool to keep inequalities in check. Whereas previous literature and statistics were already showing the existence of such a link, the IMF paper went even further by pointing out that trade unions and collective bargaining not only tend to reduce inequalities by pushing up wages at the lower end of the pay scale but also limit the income share captured by the top 10% of income earners. Moreover, the IMF research found that high trade union membership also influences the extent to which the tax system and the welfare state redistribute revenues in a more equal way.

In two recent working papers, the @OECD Economics Department also focuses on the theme of inequalities and this in ways one would not necessarily expect.

Inequalities are a lot higher than official OECD data indicate

The first OECD paper starts out by recognising that measures of inequalities based on household surveys are not suited to capture top incomes. This is due to higher than average non-response rates, the unwillingness of top earners to provide accurate data or disclose sensitive information, as well as the censuring of income amounts above a certain threshold in public datasets. 
Going on from there, the OECD develops a methodology that combines the incomes of the bottom 90% (as derived from the usual household surveys) with statistics for the richest 10% that are adjusted for the missing top incomes (the “1%”) and based on taxation data.

The results are rather shocking: inequalities turn out to be a lot higher than previously thought.

When household survey based data are adjusted for the top incomes, the Gini coefficient (which is a measure of the extent of inequalities, the higher the coefficient the higher the inequalities) jumps from 0.31 to 0.37 on average for OECD countries. An even clearer measure is the ratio of the mean income of the richest to the poorest 10%, which increases from 10 to 15. In other words, the richest 10% in the OECD do not earn 10 times more than the poorest 10% but actually 15 times more. Graph I show the outliers in this respect: in Chile and Mexico, the 10% at the top end earn up to 60 times more than the bottom 10%. In Europe, Spain’s ratio is striking (20 times more), although inequalities in the US (almost 30 times more) still beat Spanish outcomes.

Stronger trade unions and lower wage inequalities go hand in hand

A second OECD Economics paper confirms the insights from the IMF. While the scope of the econometric work done by the OECD is limited in comparison, also due to the fact that it focuses on European countries as well as on wage inequalities (as opposed to inequalities in total revenue), the findings are strikingly similar.

Graph II, taken from the OECD paper, confirms that higher rates of collective bargaining coverage across Europe neatly go hand in hand with a lower share of wage income that is captured by the top 1%.

Finally, Graph III drives home the message that the 1% top labour income earners (mostly CEOs, males between 40 and 60, working in finance and industry, getting high bonuses, etc.) are able to capture between 4% and up to almost 9% of all labour income in an economy. The UK, along with Central and Eastern European economies, has the highest income shares for the top 1%.

Why does high trade union membership reduce inequalities?

Here, the story is about ‘balance of power’ with strong trade unions being able to mobilise countervailing forces against market outcomes. Through the process of collective bargaining, trade unions are able to get a better deal for low and middle wage workers and secure fair levels of wages by resisting the managerial prerogative to decide almost unilaterally on wages and working conditions.

This, in turn, makes it more difficult for capital owners and top executives to seize an important or disproportionate share of the total value added by the company. On top of this, strong trade unions are likely to increase workers’ influence on corporate policy, thereby influencing decisions on top executive remuneration and dividends.

The principle of ‘counter veiling power’ exceeds the level of the individual workplaces and also works at the macro level. In doing so, trade unions also take up the role of a broad political force that is co-shaping tax and benefits systems. By weighing on the political process, unions can prevent already powerful ‘insiders’ from rigging the re-distributive design of the system in their favour.