Reports from the Economic Front

a blog by Marty Hart-Landsberg

Unions Fight Inequality

The decline in unionization is one of the most important factors promoting the concentration of income at the upper end of the income distribution.  The statement may not surprise you, but the fact that this was the conclusion of an IMF study of the causes of inequality might.

Here is how the authors of Inequality and Labor Market Institutions summarize their main findings:

The results indicate that the rise of inequality in the advanced economies included in this study has been driven by the upper part of the income distribution, owing largely to the increase in income shares of top 10 percent earners. We find evidence that the decline in union density—the fraction of union members in the workforce—is strongly associated with the rise of top income shares. . . . Our empirical results also indicate that unions can affect income redistribution through their influence on public policy. We further find that reductions in the minimum wage relative to the median wage are related to significant increases in inequality.

Of course, the authors of the study were quick to add: “These findings, however, should not be seen as a blanket recommendation for strengthening these labor market institutions.”

While we should never count on the IMF to promote progressive policies, the findings of the study do highlight the importance of a strong trade union movement if we want to build an economy that works for the great majority of working people.  The fact that unionization has been in decline in the great majority of the twenty advanced capitalist countries studied by the IMF researchers strongly suggests that elites know exactly what they want.

Trends in inequality and labor market institutions

Inequality has been on the rise in almost all advanced capitalist economies, with attention increasingly focused on the growing concentration of income at the top of the distribution.  Common explanations for this trend include globalization, skill-based technological change, financial deregulation, and the decline in top marginal personal tax rates.  In their study for the IMF, Florence Jaumotte and Carolina Osorio Buitron investigate whether labor market institutions, in particular the degree of unionization and relative value of minimum wage, might also be responsible.

The authors examine inequality trends in twenty advanced capitalist countries over the period 1980 to 2010 using two main measures of inequality, the income share of the top 10 percent earners and the Gini coefficient (which ranges from 0 to 1 with higher numbers showing greater inequality).  The former is most useful for capturing changes at the top of the income distribution.  The latter, because of data limitations, is better at showing changes at the middle and bottom of the income distribution.  They therefore use Gini coefficients of gross and net income to test whether the strength of labor market institutions affects redistribution.

Figure 2 below illustrates the growth in inequality in the sample of advanced capitalist economies, and the importance of income concentration at the top of the income distribution.  As the authors explain:

Gross earnings differentials between the 9th and 5th deciles of the distribution have increased over four times as much as the differential between the 5th and 1st deciles. Moreover, data from the Luxembourg Income Survey on net income shares indicate that income shares of the top 10 percent earners have increased at the expense of all other income groups.

Figure 3 looks at trends in union density and relative minimum wage values, the authors’ proxies for the strength of labor market institutions.  As we can see, the degree of unionization has fallen steadily over the period, while the decline in the relative value of the minimum wage has been far more modest.  However, national experiences differ greatly.  In the case of union density, some countries actually registered an increase while in others density declined by almost 50 percent. Interestingly, the authors find no evidence of a relationship between changes in union density and changes in the minimum wage.

Union strength reduces inequality

The authors begin their test of the relationship between labor market institutions and inequality by running simple correlations between the two.  They find

a strong negative relation between the top 10 percent income share and union density, both within and across countries. The Gini of gross income is also negatively related with union density, but the relationship is somewhat weaker and mostly present within countries. The correlation coefficients for the minimum wage and the various inequality measures are more mixed. A similar exercise suggests a positive association between union density and redistribution: while the correlation between union density and the Gini coefficient of gross income is weak, its correlation with the Gini of net income is clearly negative.

While these correlation results suggest that greater union density helps workers claw back income from those at the top and improve the overall income distribution, simple correlations are far from conclusive because they do not hold other factors that might influence the variables constant.

Therefore, the authors use sophisticated econometric methods to try and isolate the importance of labor market institutions on inequality.  Among the factors they control for are:

technology (the share of information and communications technology capital in the total capital stock); globalization (the share of China in world exports interacted with the country’s lagged level of income per capita); financial reform (the index constructed by Abiad, Detragiache, and Tressel, 2008, which varies with changes in credit controls and reserve requirements, interest rate controls, entry barriers, state ownership, securities market policies, banking regulations, and capital account restrictions); the top marginal personal income tax rate; and a banking crisis dummy variable.

The authors find, consistent with the literature, that technology, globalization, financial liberalization, and tax reductions all increase inequality, with the latter two variables positively associated with an increase in top income shares.  But they also find a significant negative relationship between union strength and inequality and income concentration:

Our benchmark estimates of gross income inequality indicate that the weakening of unions is related to increases in the top 10 percent income share. A 10 percentage point decline in union density is associated with a 5 percent increase in the top 10 percent income share. The relation between union density and the Gini of gross income is also negative and significant.

At the other end of the income distribution, the minimum wage is closely associated with the Gini coefficient of gross income but not with the top income share. A 10 percentage point decline in the ratio of the minimum wage to the median wage is related to a 5 percent increase in the Gini coefficient of gross income.

The authors then test the robustness of their results by adding additional labor market, economic, and social variables, but with little change in outcome.  Their strong conclusion remains: an increase in union density reduces the share of income going to the top 10 percent and improves the overall distribution of income.

Magnitude of the effects

The authors illustrate the relative importance union density and the minimum wage to the growth in inequality in Figure 7, below. “The height of each bar measures the contribution of a variable to the rise in inequality over the period 1980–2010—calculated as the product of the change in the variable over the period and its coefficient—averaged across countries.”

More specifically, as the authors explain:

On average, the decline in union density explains about 40 percent of the 5 percentage point increase in the top 10 percent income share (top panel). . . . By contrast, the decline in unionization contributes more modestly to the rise of the gross income Gini, reflecting the somewhat weaker relation between these variables. However, about half of the increase in the Gini of net income is explained by the decline in union density, evidencing the additional and statistically significant relation between this institution and redistribution. The decline in union density was a widespread phenomenon which, as our estimation results suggest, could be an important contributing factor to the rise in top income shares (middle panel).

Contributions of changes in the minimum wage to inequality appear close to zero on average. However, averaging its contribution across countries hides the important role the minimum wage has played in driving inequality in some countries, as its evolution has been highly heterogenous. Bottom panel in Figure 7 shows the country-specific impact of changes in the minimum wage on the Gini of gross income. In countries where the minimum wage declined the most, it accounts for about 2 percentage points of the increase in the Gini coefficient. Conversely, where the minimum wage rose substantially, it appears to have contributed to reduce the Gini coefficient by 2 percentage points. Overall, these illustrative calculations suggest that changes in labor market institutions are key drivers of the evolution of inequality, alongside other determinants.

Next steps: Movement building

Living conditions have deteriorated for majorities in most advanced capitalist countries.  The rise in inequality, driven by the ever-increasing concentration of income at the top of the distribution, is one major reason.  The IMF has laid out a clear program of action to improve things: strengthen unions and boost minimum wages.  Of course, our fight against inequality would be greatly enhanced if we also intensified our efforts to stop the advance of capitalist globalization, reverse the financialization of economic activity, and raise taxes on the wealthy.

I am not sure that we needed IMF researchers to clarify our tasks, but thanks anyway IMF!

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