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16 September 2015

Decline in collective bargaining has a direct negative effect on economic growth

A new report from the University of Greenwich and the New Economics Foundation shows, on the basis of econometric evidence, that trade unions have a role to play in boosting the economy and fighting inequality.

The evidence presented in the report shows that, for a ‘range of EU countries, including the UK, an increasing presence of trade unions would ensure that a greater share of economic output is distributed to the labour force’. Explaining that weakened unions have reinforced the shift in the distribution of income towards capital rather than the labour force, the report demonstrates that the decline in the bargaining power of trade unions, and consequent shift away from wages and salaries, has a direct cost in terms not only of fairness but also of economic outcomes.

These arguments are based on the fact that wages provide a market demand for output, leading to higher consumption, and that the resulting increasingly robust markets will in turn lead to increased investment by businesses. In a wage-led society, such as the UK and most other EU countries, where the main component of demand is spending by individuals from their wages, growth in national income is driven primarily by growing wages rather than increasing company profits.

In the UK the loss of output from falling wage share and declining trade union bargaining power has had a negative impact on GDP. It has been estimated that over the past three decades, the UK’s GDP has been reduced by 1.6% as a consequence of the decline in unionisation. By contrast, if union density were to climb back up to 49.9% (the same level as in 1981), national income would be up to 1.6% higher and the wage share would increase by 9.3%.

All in all, the report clearly shows that the ongoing debate on limiting unions’ rights to deliver higher economic growth is ill-conceived and simply cannot be justified in economic terms.

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