Did union reform succeed?

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Most British economists have been brought up to believe that industrial relations, one way or another, lie at the heart of our poor economic performance.

In the 1960s, university courses in labour economics were little more than elongated versions of the Boulting Brothers' film classic I'm Alright Jack. This phase in thinking about the labour market - which culminated in the Donovan Commission report published in 1968 - held that the key problem was a proliferation of Peter Sellers-like shop stewards dedicated to creating chaos on the shop floor. And anyone with experience of the car industry 30 years ago would confirm that this was not entirely the product of fevered imaginings of film producers.

In the 1970s, the role of the shop steward began to fade, and there was a shift towards more centralised union bargaining. Unfortunately, this heralded a marked worsening in overall macro-economic performance. Unemployment rose and, despite this, the problem of wage inflation reared its ugly head as never before. By the end of the 1970s, there was a national consensus that something had to be done to curb 'excessive' union power.

People now vividly remember the role that Lady Thatcher played in framing this consensus. But even Jim Callaghan, who led the struggle against statutory union reform in the 1960s, was by 1979 fighting tooth and claw for a new voluntary code of union practice to be agreed with the TUC. With the chance of voluntary reform clearly biting the dust in the Winter of Discontent in 1978/79, many in the outgoing Labour Cabinet were secretly relieved that the dirty business of curbing the unions - for that was quite simply how the industrial relations 'problem' was by now described - could be left to the shrill lady from Grantham.

What happened next was in one sense the most spectacular success for economic policy-making in the post-war period, and in another sense its most puzzling and abject failure. Through a series of carefully plotted manoeuvres, involving a progressive transformation in industrial relations law and culminating in the victory over the miners in 1985, the Conservative government successfully faced down the unions.

Professor David Metcalf of the London School of Economics has recently published a typically excellent paper analysing what was done. He points out that the period since 1979 represents the longest continuous period of declining union membership. The number of establishments recognizing unions fell from two-thirds to half. Closed shops ceased to exist. Private sector industrial action virtually fizzled out.

In 1979, hard though it is to recall, unions were entirely immune from the civil law. Now, the only trade disputes subject to immunity are those between workers and their own employers, following majority support from the workforce in a secret ballot. As in so many things, these changes in the law would not have been important without an accompanying change in national attitudes. But that change, fostered by Lady Thatcher and her acolytes, has been huge and for the moment looks irreversible.

The trouble is - and here is the extraordinary part - none of this appears to have made any difference to the macroeconomic performance of the economy. It would have been accepted as common ground among economists 15 years ago that a successful assault on union power would assuredly have reduced the 'equilibrium' level of unemployment, or that required to hold inflation constant. And along with the decline in the average level of unemployment, output should have risen, allowing other structural problems (such as the balance of payments deficit) to improve. In other words, the supply side of the economy should have been transformed.

Far from this improvement having actually occurred, the supply side of the economy seems to have gone from bad to worse. The number of unemployed people required to hold inflation constant has, on most estimates, doubled during the 1980s, from about 1.25 million to around 2.5 million.

There is no unequivocal evidence that a reduction in union power leads to greater investment in modern plant and equipment; in fact, rather the reverse. The Chancellor has tentatively suggested that firms have been unusually quick to shed labour in this recession, and therefore that they may be quicker than usual to take on workers during the recovery. It would be nice if this were true, but the graph shows that in fact productivity in the whole economy has performed no better in recent months than it did at the same stage of the last two recessions.

Those economists who were most vociferous in the late 1970s in their demands for trade union reform have naturally been among the most reluctant to accept that the great endeavour has failed to have the beneficial results predicted for it. Professor Patrick Minford, for example, is practically alone in estimating that, because of the labour market reforms, the 'equilibrium' level of unemployment has in fact dropped to around 1 million.

If he is right, then the medium- term outlook for the economy is unreservedly rosy. Wage and price inflation should stay very low as the economy expands, and the drop in unemployment towards 'equilibrium' should produce sufficient output both to eliminate the budget deficit and to keep the balance of payments deficit under control.

But why has none of this so far started to happen? The crucial labour market reforms were fully in place almost a decade ago. Is it really plausible that the economy has still to start adjusting to these reforms by returning to a phantom 'equilibrium' level of unemployment which is about one-third the present level? Surely this is a distortion of the word 'equilibrium'. Is it not much more likely that something in the process of reform has more than offset the benefits of a less unionised labour force, resulting in a permanently higher level of 'equilibrium' unemployment?

That something might be the rise in long-term unemployment. Or it might be the enhanced power of 'insiders' - those who have kept their jobs - in the new labour market. These incumbent workers (ie most of us) have been more able than ever before to pursue their own interests without regard to the interests of the unemployed.

To ignore these possibilities - and with them the likelihood that the union reforms of the 1980s have badly backfired - is nothing more than groundless optimism.

(Graph omitted)