Economics: Not much to show for smashing the unions

IN 1979, the trade union movement stood condemned as the main agent of Britain's economic decline, guilty of fostering inefficient working practices and inflationary pay settlements. Fifteen years later, as last week's TUC conference showed, the movement is a shadow of its former self. But where is the evidence that the economy has benefited as a result?

The humbling of the unions has been more dramatic than even the most hardened free-marketeer could have wished. Membership has dropped from nearly 13.3 million in 1979 to around 7.2 million in 1994. This has cut the proportion of the workforce with union membership from more than half to barely a third. Collective bargaining over pay and conditions now takes place in only a minority of workplaces, compared to nearly three-quarters in the mid-1970s.

Several factors explain this decline. Some economists blame it entirely on higher unemployment. Rising joblessness has certainly done the unions no favours, but remember that their membership continued to drop even when unemployment was falling fast.

The changing composition of the workforce may be more important. Unions have never been good at recruiting women, part-timers, non-manual workers and people in service industries. All these groups have been growing at the expense of the unions' traditionally male and blue-collar constituency. The unions have reacted defensively, pursuing mergers rather than boosting aggregate membership.

But the Government's step-by- step legislative attack on the unions is surely the most important cause of their emasculation. Statutory procedures for union recognition have been abolished, picketing limited, the closed shop outlawed, legal immunities weakened and pre-strike ballots enforced. It is hardly surprising that strike activity has fallen to record lows. Having said this, the number of 'grievances' notified to Acas, the arbitration service, is little changed from the late 1970s. This suggests the strike figures overstate the improvement in the climate of industrial relations. They may simply reflect the unions' more limited room for manoeuvre.

The combination of adverse legislation and an unfavourable economic tide has tipped the balance of power away from the unions and towards management. As a result, unions have found it increasingly difficult to deliver the goods. In 1984, semi-skilled employees in a unionised workplace earned 8 per cent more than their non-unionised counterparts. By 1990, this mark-up had dropped to 6 per cent and has presumably shrunk even further since then.

This mark-up disappears entirely in companies which operate in highly competitive markets. Only when firms have a significant degree of monopoly power do they have sufficient 'excess' revenue over which the union and management can meaningfully bargain. This suggests the fall in the union mark-up during the 1980s can be explained in part by the increasing integration of the European economy, which has exposed more companies to competition from overseas rivals. At the same time government subsidies have been withdrawn from many monopolistic, highly unionised industries.

Falling union membership and the growing inability of unions to secure higher pay for their members have certainly helped contribute to the dramatic growth in inequality in Britain during the past 15 years. One study argued that declining unionisation explained a fifth of the rise in semi-skilled wage inequality during the 1980s.

But the evidence that the decline of the unions has boosted employment and other measures of economic performance is much less clear cut. Professors David Blanchflower and Richard Freeman have tried to assess the impact of the Thatcher reforms on the functioning of the labour market. In addition to the weakening of the unions, they looked at the impact of changes in the tax structure and efforts to make social security benefits less generous and more difficult to claim. They concluded that the reforms had made employment and wage levels a little more flexible at company level, but had failed to make wages more responsive to changing unemployment in the economy as a whole.

Penelope Rowlatt, who used to forecast inflation at the Treasury, reached a similar conclusion in a study published last week in the Institute for Public Policy Research's New Economy. She argued that average earnings in manufacturing tend to grow in line with the sum of the rate of inflation and the trend growth rate of productivity - output per person.

The attack on the unions might have been expected to change this relationship, making it more difficult for them to secure pay settlements which offset inflation. For two wage rounds in the late 1980s this was indeed the case - average earnings growth remained flat rather than rising in line with accelerating price increases. But by late 1991 the old relationship had re-established itself, which suggests that the current low level of pay settlements reflects low inflation rather than any transformation in the wage-setting process.

But Professor Patrick Minford, a monetarist member of the 'six wise men' who advise the Chancellor, argues that the reforms of the Thatcher era have changed the economy for the better. The Government has simply lacked the confidence in the success of its policies to take advantage by cutting interest rates far or fast enough.

Professor Minford argues that unemployment could safely be pushed down to below 1 million without an excessive resurgence in inflation, while most economists believe inflation would accelerate before unemployment had fallen to anywhere near 2 million.

But the attack on the unions may have been the right policy at the wrong time. Blanchflower and Freeman argue that the Thatcher reforms might have done wonders when the economy was running at near full employment in the 1950s and 1960s, but not when unemployment became so high.

High unemployment results in rising long-term unemployment. The long-term jobless cannot compete for existing workers' jobs, because they become demotivated and unattractive to employers. This means there is less pressure on 'insiders' with jobs to moderate their wage claims. This could explain why the wages of those in work remain as high as they do.

The decline of collective bargaining may have had a similar effect. Employees need be less concerned that their wage settlements will raise the prices they pay in the shops. And employers have more scope to retain and motivate workers by paying relatively high wages. The shift in demand for labour towards flexible employees with good education and skills also means that more people are finding they have as much bargaining power as individuals as they used to do as members of a union.

The assault on the unions certainly does not appear to have yielded the scale of economic benefits that might have been expected 15 years ago. We cannot be sure, because it is impossible to disentangle the impact of the Thatcher reforms from the catastrophic mismanagement of macroeconomic policy that has accompanied them. But, as the recovery gains in strength, it would be dangerous to act as though the crusade against the unions had really delivered the economic miracle claimed for it.