By a vote of 315 to 116, the US House of Representatives has overwhelmingly approved a two-year 41% increase in America's minimum wage - the first change in the pay floor in 10 years. The bill is likely to pass the Senate and be signed into law by President Bush. This is only the beginning of what could well be a major pro-labour swing in the US political pendulum. But there is an important twist to labour's comeback: Lacking in bargaining power in the face of an increasingly powerful global labour arbitrage, American workers are in no position to take action on their own. Instead, they have put pressure on their elected proxies to do the bidding for them. This pattern is global in scope. It is likely to be a significant feature of the coming swing in the pendulum of economic power from capital to labour.
How labour lost its bargaining power
Declining union membership throughout the major economies of the industrial world underscores the loss of labour's bargaining power in an era of globalisation. "Union density" - union members as a proportion of employed wage and salary workers - has fallen dramatically since the early 1970s. Sharp declines are evident in the US, Europe, Japan, and the UK; a modest drop in Canada is the only real outlier. The US stands out with a unionized sector that is less than half the size of that evident elsewhere in the major developed economies. Patterns in union density differ in some of the smaller countries not shown in this tabulation. That's especially the case in Scandinavia, where the share of unionized workers remains above 70% in Finland, Sweden, and Denmark, and above 50% in Norway. Moreover, there are also some notable extremes in the current rate of union density within the pan-European aggregate - namely, France (8.3%) and Spain (16.3%) at the low end and Italy (33.7%) and Belgium (55.4%) at the upper end.
These aggregate measures of union density overstate the bargaining power of employees in the major developed economies. That's because they reflect extremely high union representation of public sector employees that masks considerably lower unionized shares in private industries. In the United States, for example, private sector union density stood at just 7.8% in 2005 - well below the 36.4%% share for public sector workers. Similarly, the latest readings on private sector unionization in the other major developed economies were well below those for government employees - 17.0% in Japan (versus 58.1% for public employees), 21.9% in Germany (versus 56.3% for public employees), 5.2% in France (versus 15.3% for public employees), 17.2% in the UK (versus 58.8% for public employees), and just 17.8% in Canada (versus 72.3% for public employees). This dichotomy between high union representation for government workers and considerably lower union membership in the private sector makes the point on labour's lack of protection even more forcefully. Cross-border competition is not a consideration for public sector workers. Conversely, much lower, and steadily declining private sector union density ratios speak to an even sharper erosion of bargaining power for those directly exposed to the tough competitive pressures of globalisation.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How globalisation and new technology strengthened capital
There is, of course, an added complication to this story - a virtual doubling in the size of the global labour force over the past 15 years. Courtesy of the ascendancy of China and India, in conjunction with the demise of the former Soviet Union, Harvard Professor Richard Freeman estimates the global workforce hit 2.9 billion workers in 2000 - essentially twice the size that would have existed had those nations, or blocs, remained on the outside looking in (see his 2005 paper, "The Great Doubling: Labour in the New Global Economy"). This extraordinary infusion on the supply side of the global labour market adds a very different dimension to the global labour arbitrage. An increasingly powerful surge of global trade is the smoking gun insofar as the impacts on the developed world are concerned. With cross-border trade hitting a record 30% of world GDP in 2006, more and more production and employment is shifting to the low-cost, low-wage developing world. This has led to a profound sense of angst for high-wage workers in the developed world.
New labour-saving technologies only reinforce these trends. That's especially true of the IT-enabled technologies of the Information Age, which have undoubtedly accelerated the pace of capital deepening - the substitution of capital for labour - in the developed world. The automation of once labour-intensive information processing and dissemination is especially noteworthy in that regard. It has broadened the focus of capital-deepening strategies - in effect, shifting the pressures away from shrinking numbers of blue-collar workers in manufacturing toward vast legions of white-collar, knowledge workers in services.
The combination of these powerful forces makes for a very potent brew. Courtesy of globalisation, in conjunction with diminished unionized bargaining power and technology-led labour displacement, workers in the high-wage developed economies are being squeezed as never before. Econometric support for this same conclusion can be found in a recent study by Anastasia Guscina of the IMF (see her December 2006 IMF Working Paper, "Effects of Globalisation on Labour's Share in National Income"). In examining the experience of 18 industrial economies over the 1960 to 2000 period, Guscina dismisses any cyclical explanation for the squeeze on labour income and concludes, instead, that this phenomenon is traceable mainly to the structural pressures of technological change and diminished worker protection.
Why it will be politicians, not workers, who take action
All this frames the time-honored tug-of-war between capital and labour in a very different context. With the labour shares of national income at historical lows for the major economies of the industrial world and the shares accruing to the owners of capital at equally high extremes, the stage is set for a pro-labour shift in the pendulum of economic power (see my 23 October 2006 dispatch, "Labour versus Capital"). Yet the outcome points to more of a political backlash than a worker backlash. Lacking the wherewithal for collective action, workers in the industrial world have little or no choice other than to put pressure on their elected representatives to take actions on their behalf.
Recent political developments in the US, France, Germany, Italy, Spain, Japan, and Australia are especially intriguing in this regard. In all these cases, the pendulum of political power is now in the process of shifting to the Left. Lacking in bargaining power in increasingly globalized labour markets, it shouldn't be surprising that workers are now exercising political power in the polling booth. No, the increase in the minimum wage is not going to break the back of US cost control (see David Greenlaw's 12 January dispatch, "The Minimum Wage Hike and the Economy"). However, I suspect there is a good chance this action could well qualify as the proverbial canary in the coal mine - the beginning of what could be an important and enduring increase in labour's slice of the pie in the rich countries of the industrial world. Needless to say, any such shift from a pro-capital to a pro-labour climate could prove to be a very challenging outcome for world financial markets - unwinding the long-standing underpinnings of an asset-friendly climate and raising risks to inflation, interest rates, and corporate earnings.
By Stephen Roach, global economist at Morgan Stanley, as first published on Morgan Stanley's Global Economic Forum
House prices rising fastest in areas with highest crime rates – where does your area rank?
State pension age review launched – could it rise faster in future?
