Trade unions and countervailing power

The controversy surrounding the proposed budget bill by the Wisconsin Governor Scott Walker to strip collective bargaining rights and various employment benefits from public employees in Wisconsin has opened up an acrimonious debate about the role of unions and the widening inequality in the US.

Supporters say that restricting the collective bargaining powers of unions can improve governments' ability to improve functional effiency and can save millions of dollars. They also claim that public employees, especially teachers, are heavily paid in comparison to their private sector counterparts, despite being functionally inefficient.

Opponents see this as part of the grand right-wing agenda to shrink the government. They argue that collective bargaining provides workers with important protections against retaliation, age discrimination and arbitrary management decisions. In the absence of collective bargaining powers, unions will become toothless, and employees will prefer not to pay and drop out from union membership. One of the most important instruments to check the widening wage inequality within organizations in the US will therefore become blunt. They point to evidence that even with benefits, public sector workers are not, on average, grossly overpaid compared with the private sector.

The bill would limit collective bargaining powers by public workers only to pay, and salary increases wouldn’t be allowed more than inflation. It will also force public employees to pay more in health and pension costs, contracts would last only one year at a time, employees would have to re-certify the union annually and individual members would be able to withhold dues from their union. The Bill has gathered support from like-minded conservative Governors, especially in southern states with strict right-to-work laws in place.

The Wisconsin decision follows similar decision by Indiana in 2005, which banned state-level negotiations on subjects like outsourcing, health coverage, workloads and seniority. The push for restricting workers rights has been triggered off by the impact of the Great Recession which has exposed the perilous state of local government finances across the US. States face deficits that may reach a combined $125 billion in the next fiscal year, with generous health care and pensions being the major contributors.

Popular debate on the issue has focussed attention on the importance of collective bargaining in protection of workers rights. However, as Jacob Hacker and Paul Pierson tell us in their new book, Winner-Take-All Politics, the importance of unions lie not so much in smaller details like collective bargaining, but in their critical role as an influential countervailing power. They say,

"Economists generally err in thinking that unions influence the income distribution mostly through direct negotiations with employers. Instead, we argue the most important role these forces play is to create some organized countervailing pressure in Washington. Cross-national research suggests that strong labor unions are associated with greater government redistribution through taxes and transfers. The United States is one of only a handful of countries where government taxes and benefits have become less redistributive as inequality has grown."

Their argument that the emergence of the "winner-take-all economy", with its extreme concentrations of wealth, is a consequence of the "declining clout of middle-class voters and unions relative to a much more organized and mobilized corporate sector" is hard to argue against.

One of the more interesting, albeit less-discussed, features of the push against unions and public sector workers in particular and government in general, is what it tells us about the political balance of power. Conventional wisdom would have it that in democracies, policies that adversely affect the interests of the largest groups are bound to fail because of the dynamics of electoral politics.

However, as Mancur Olson and others have famously pointed out, the power structure of modern capitalist democracies is considerably more nuanced. There is a strong element of collective action problem with the majority. This inability to act collectively is amplified by the widely heterogenous nature of the working class majority.

In contrast, the minority business elites are well connected across party lines, have much more to lose or gain by specific policy interventions, are a focussed and homogenous minority, and have deep-pockets. The extraordinary resilience of financial market interest groups despite its obvious role in causing the Great Recession is only the recent example of this trend. Similar explanations can also atleast partially explain the persistence of discredited supply-side theories and the rise of the Tea Party movement in the US.