Christine Lagarde speaks at the IMF 2014 meeting in Washington. Photo: IMF Staff Photograph/Stephen Jaffe

Want to reduce inequality? New IMF research says unionisation is key

22 Jul 2015, by Owen Tudor in Economics

Through gritted teeth, the International Monetary Fund (IMF) has this week issued a ‘staff discussion note’ which contains a bit of a bombshell. The ballooning inequality that results from rampaging top people’s pay is not, as previously thought, an unfortunate by-product of technological process or increasing world trade. At least forty percent of the increase in bosses’ pay is down to the decline in union influence. And a further increase in inequality results from reductions in the level of minimum wages. Who could have guessed it?

The IMF staff are quick to point out that this doesn’t mean they support blanket measures to increase unionisation, promote collective bargaining or raise minimum wages. They say that decisions need to be taken on a country by country basis to avoid such measures increasing unemployment (I’ve blogged about what could be done to forestall that on Stronger Unions.) But the message is nonetheless pretty clear. The researchers find that higher union density is particularly linked to a more equal distribution of net incomes, indicating union’s strong impact on redistributive policies. According to their results the decline of union density explains on average 40 percent of the increase of the top 10 percent income share over the period under consideration (broadly, 1980-2010.) And it’s worth remembering that the IMF considers such inequality to be a pretty bad thing.

There are two key ways in which lower union density has allowed top people’s remuneration to leap ahead of the rest of the workforce. Firstly, and obviously to anyone but an economist, if unions are less able to secure wage rises for the mass of the workforce, there is more left over for the people at the top. Wage restraint for one group of stakeholders in a company means a blowout for the people at the top – again, who’d have thunk it?

Secondly, although much more difficult to quantify, the researchers accept that weaker unions mean that the political pressure for more redistributive action – such as progressive taxation, stronger public services, higher benefits for the unemployed and disabled and so on – is reduced. Rich people get to keep more of their income because unions are less able to press governments to take it and use it for measures which benefit the mass of the people.

One of the two authors of the paper, Florence Jaumotte, said in an interview at the end of last week that:

“We find that the decline in unionization is strongly associated with the rise of the income share of the top 10 percent of earners (to the detriment of middle- and low-income workers) in advanced economies. This holds even after controlling for other established determinants of inequality, such as technological progress, globalization, political and social factors, financial deregulation, and declining top marginal tax rates. “Moreover, the weakening of unions appears to be associated with less income redistribution, likely through a reduced influence of unions on public policy. Although causality is always difficult to establish, the decline in unionization appears to explain about half of the observed increase in top income shares and in the Gini of net income (a summary statistic that gauges the average difference in income between any two individuals from the income distribution). “In some countries, the erosion of minimum wages (relative to median wages) is also correlated with considerable increases in overall inequality.”

It took the IMF four months to get round to releasing this paper (originally trailled in a magazine article back in March) and a cynic might suggest that it has been held back until after the Greek bailout was agreed, including measures that will clearly – on the basis of this research – increase inequality by weakening unions and collective bargaining still further. The fact that its release coincides with the beginning of the northern hemisphere holiday season may also be deliberate.

But the message is pretty clear. It’s not changes in labour market structure, or economic progress, that leads to ballooning, and damaging, inequality. It’s attacks on unions. Ironic, then, that this comes out a week after the Conservative Government unveiled yet more attacks on us!