Pay and Jobs

Samuel Brittan

  • Stagflation. Vol. 1: Wage Fixing by James Meade
    Allen and Unwin, 233 pp, £15.00, January 1982, ISBN 0 04 339023 4
  • Prices and Quantity by Arthur Okun
    Blackwell, 382 pp, £15.00, August 1981, ISBN 0 631 12899 9

All monopolies work by raising the price per unit sold at the expense of a reduction in volume. Unions are no exception. They are in business to raise the pay of those already employed, even at the expense of fewer jobs. Fear of redundancy is some check, although a limited one where the majority remain at work. Reductions in employment which occur through natural wastage and non-recruitment are much less of an inhibition. Those priced out of work by union activists have the choice between being crowded into inferior jobs in the non-union sector (which is very small for manual workers, and almost non-existent in the public services) or the dole. The effect of union power on employment is thus clearly adverse. But how large a role it has had in producing the current total of three million unemployed is more debatable. James Meade has no doubt that it has played the key role; and he devotes the greater part of the first of his two volumes on Stagflation to an analysis of reforms in wage-fixing methods which would promote rather than destroy employment. The reforms, he believes, must come in the guise of incomes policy.

Although written with the clarity one has come to expect of Meade, there is a certain quality about the book which enables people of different economic persuasions to assess it in very different ways and read into it what they would like to find. One reason for this is that, as in the case of John Stuart Mill, a writer with whom one may notice many parallels, there is something of a conflict between heart and head, and between the intellectual positions which logic forces him to accept and the ones with which he feels most at home. Although union monopoly power plays a key role in his analysis, he is as anxious as Mill was to show that he is not opposed to organised labour. Both writers hope that union leaders and activists will change their attitudes when faced with clear-sighted analysis presented in a benevolent spirit and with a readiness to pursue egalitarian aims by other (in practice, largely fiscal) means. It is nevertheless possible that, for all his desire not to appear antiunion, Meade may exaggerate the role of union wage-fixing in the current stagflation. After all, we did have powerful unions with half a million unemployed and only slow, creeping inflation in the Fifties and early Sixties. What has changed?

Meade cites technological developments which have increased the power of compact groups of workers to push for wage increases, the differentiation of products which is said to make employers less resistant to claims, industry-wide bargaining which guarantees similar cost increases to rival employers, higher rates of unemployment and social-security benefit which have increased ‘workers’ staying power’ – and thus their ability to secure monopolistic pay increases – and the improved legal position of the unions after the legislation of the Seventies, as reasons why union ability to price people out of work has increased. One piece of solid evidence of an increased unionisation effect is the increase in trade-union percentage of the labour force from 43 per cent in 1963 to 56 per cent in 1979. But many of the other forces mentioned by Meade were just as strong in the Fifties and Sixties as they are today. We certainly heard nearly as much about them from the advocates of incomes policy: but at that time union power coexisted with very low unemployment and a moderate and stable inflation rate. There is no doubt that unions, like other monopolistic organisations, have boosted the price of their workers’ services (i.e. their wages) at the expense of volume (i.e. employment). But we are still faced with the awkward fact that unemployment has shot up in countries with widely varying degrees of unionisation, widely varying legal and effective power for unions, and widely varying degrees of ‘responsibility’ in the use of that power. It would be a remarkable coincidence if these influences had increased drastically in nearly all countries at the same time.

Take another favourite explanation: the rise in social benefits relative to normal wages which has created ‘poverty trap’ disincentives to work. The big rise in the ratio of social-security benefits to average post-tax wages took place between the early Sixties and the early Seventies. Since then, it has fluctuated in both directions under the influence of tax and social-security changes. As a result of the reduction in the real value of benefits and the forthcoming taxation of social-security payments, the ‘Why work? syndrome’ is likely to diminish substantially in 1982.

There is, of course, a great deal more to say about the matter, and especially about the cultural changes which have made the drawing of benefit much more widely acceptable (for instance, among middle-class students and young people) than it used to be. But the clinching argument against either a trade union or a ‘poverty trap’ explanation of the rise in unemployment is that the latter is a common international phenomenon. It would be quite remarkable if there had been a crop of tax and social-security disincentives unfavourable to work in all countries simultaneously. Just as remarkable as if there had been a simultaneous increase in union power.

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