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What price trade union reform?

REFORM of the labour market has been a central plank of the post-1979 Conservative Government's economic programme. Ministers charge trades unions with inhibiting the flexible operation of the labour market by bidding for unrealistic wage increases, thereby |pricing their members out of jobs'. Perhaps more significantly, unions are also accused of inhibiting the private sector investment that is essential for Britain's longer term economic success. This article outlines the Government's legislative reforms of the labour market since 1979 and critically examines their rationale, casting doubt upon the extent to which they have contributed to an improvement in the economy's long-term growth prospects.

Since 1979, a series of statutes has placed restrictions on trade union activity, in order, according to a Treasury statement in 1986, to: |reduce the monopoly power of the trade unions. . . (and so) create a climate in which realistic pay bargaining and acceptance of flexible working practices become the norm'. The Conservative Government has targeted two aspects of trades unions in particular: first, their ability to undertake strike action, which has historically been protected from normal laws of contract by specific legislation (i.e., an employer is entitled to sue an individual worker who withdraws his or her labour for breach of contract, but a trade union is legally immune from such sanctions when it takes industrial action); and secondly, their right to enforce a |closed shop' (an arrangement whereby all employees within a company must belong to a recognised trade union).

With regard to strikes and other forms of industrial action, the legislation has gradually restricted the circumstances under which trades unions are entitled to immunity from prosecution by companies that are adversely affected by their actions. The 1980 Employment Act, for example, restricted picketing to an individual's place of employment, thereby making secondary picketing unlawful. Consequently, strikers picketing at locations other than their own workplace are now liable to civil action for interfering with employment or commercial contracts. The 1980 Act also restricted the legality of other forms of secondary industrial action, such as the |blacking' of goods; action must be confined to a direct customer or supplier of the employer with whom the union is in dispute.

The 1982 Employment Act tightened up the definition of a |trade dispute' (i.e., industrial action immune from civil action). It specified that a trade dispute must be between workers and their employer. Furthermore, it required that a trade dispute must |wholly or mainly' relate to employment matters, preventing unions from mounting the sort of political strikes which had enabled the miners to severely affect industrial production in the early 1970s. The 1982 Act also enabled trades unions to be sued in their own names, so that union funds were placed directly at risk. It laid down that a union would be liable for unlawful industrial action authorised or endorsed by a responsible person from the union concerned, although limits were placed on the damages courts could award.

The 1984 Trade Union Act restricted a union's immunity to cases in which industrial action has been formally approved in advance by the union members concerned. It provided that a union would lose its immunity unless it had first obtained majority support from its members -- via a secret ballot -- before authorising, or endorsing, industrial action. This was followed by the 1988 Employment Act, which gave union members the right to apply for a court order restraining their union from organising industrial action in the absence of a ballot approving such action. The 1988 Act also prohibited unions from disciplining their members for failing to take part in industrial action.

A second dimension to legislation relating to trade unions concerned statutory support for the closed shop, which was gradually removed during the 1980s. The 1980 Employment Act extended the grounds on which employees could object to union membership and tried to protect existing employees when a closed shop was introduced. It became unfair for an employer to dismiss staff for non-membership of a union, provided they could show they had conscientious or deeply-held personal reasons for not wishing to join or had been engaged before a closed shop agreement was concluded. The 1980 Act also attempted to ensure that future closed shops would only come into existence with the overwhelming support of the employees affected. It stipulated that if any new closed shop agreement was not approved of by at least 80 per cent of those to be covered by it, it would be unfair for the employer concerned to dismiss anyone for not being a union member.

The 1982 Employment Act sought to encourage periodic reviews of existing closed shops. It made it unfair for an employer to dismiss anyone for non-membership of a union, unless a closed shop agreement had been supported by 80 per cent of affected employees in a secret ballot within the previous five years. The 1982 Act also substantially increased the level of compensation payable to those unfairly dismissed in a closed shop situation.

The 1988 Employment Act gave increased protection to employers and employees against the operation of closed shops. It repealed the earlier provisions that had permitted dismissal for non-membership of a union where an |approved' closed shop was in operation, thereby making dismissal for non-membership of a union automatically unfair. It also removed all legal immunity for industrial action taken by a union to force an employer to create or maintain any sort of closed shop practice.

Finally, the 1990 Employment Act made it unlawful for employers to deny applicants a job because they were not union members. The 1990 Act also outlawed all secondary industrial action by making a union legally liable when it takes action against any customer or supplier of the employer with whom it is in dispute. In addition, the Act made unions legally responsible for unofficial strikes called by shop stewards or any lay officer -- when industrial action is organised by any union official (full-time or part-time), the action will either have to be put to the test of a secret ballot or be repudiated in writing by the union concerned. Lastly, the Act enabled employers to selectively dismiss workers taking unofficial industrial action.

The results of this legislative onslaught on the trade union movement have undoubtedly been profound. Although it is difficult to disentangle the effects of the new laws (which have tended to reduce the benefits of union membership to individual workers) from those resulting from structural economic change (which have altered the composition of the employed labour force, creating female, part-time jobs at the expense of traditional, full-time manual employment), the fact remains that between 1979-92, union density(1) fell dramatically from almost 60% to 45%. Although the Conservative Government has never suggested that it actively sought this outcome, the decline in union membership has nevertheless played a major part in altering the balance of power in the industrial relations arena, over and above the direct impact of the legislation itself.

The Government's new legal framework for wage bargaining has also contributed to a marked fall in the number of days lost through industrial disputes. Although there was a sudden surge during the protracted and highly divisive miners' strike of 1984-85, the underlying trend since 1979 appears to have been firmly downwards.

However, the ultimate objectives of the Government's reforms were not to reduce either union density or strike activity per se, but to increase the flexibility of the labour market and thereby strengthen the underlying performance of the economy. As noted above, the logic underpinning the Government's assault on the union movement was that it was responsible for demanding excessive wage claims and inhibiting the introduction of new processes and production techniques wherever these threatened the jobs of union members.

To consider each in turn, the link between trades unions, inflation and unemployment has always been controversial. Between 1960 and 1979, incomes policies (either statutory or voluntary) were in almost continuous operation in the belief that monopolistic trades unions were able to push through wage increases unmatched by higher productivity, thereby adding to inflation. Since 1979, the Government has refused to |validate' excessive wage increases, by pursuing tight fiscal and monetary policies that have forced employers to choose between paying higher wages and staying in business. Those that have submitted to unions' demands have (according to this view) either gone to the wall or been forced to shed labour in an effort to contain their wage bills. Trades unions, accordingly, have in recent years become the scapegoats for the higher unemployment, rather than the higher inflation, that their |unrealistic' wage bargaining is alleged to cause.

However, just as it was always possible to argue that, during the inflationary 1970s, unions were responding passively to higher inflation (by demanding wage rises to compensate for the erosion of their members' living standards), rather than actively driving the inflationary process forward, so it is equally legitimate to assert that unions cannot be held responsible for today's unemployment. The inflationary boom of the late 1980s and the deflationary recession of the early 1990s were both unequivocally the products of mismanaged government policy. Just as wage increases take time to catch up with a sudden surge in inflation (which is why unemployment falls during a boom), so there is a delay before they slow down during a deflationary period. But such institutional inertia, which is also present within the non-unionised sector, cannot meaningfully be blamed for the unemployment that results from the cynical manipulation of the business cycle for political motives. This unemployment, quite clearly, must be laid firmly at the door of the Government.

The charge that unions inhibit structural change is, on the surface, more difficult to refute. The trade union movement in Britain has historically been |craft-based', with workers joining unions that cover their particular occupation (e.g., printing or engineering). The monopoly power of an individual trade union thus consists in its power to control labour of a specific functional type. For example, a nationally-based engineering union can bargain with employers from a very powerful base, since companies will find it difficult to recruit qualified engineering workers who are not union members.

It is clear that such a union structure may militate against structural change. Research and development as well as capital investment strengthen the economy by improving productivity; that is, by changing the way that people work in ways that increase output per head, but at the cost of changes in the demand for different types of labour. For example, the computerisation of newspaper typesetting, which allows journalists to type their stories into a computer that automatically sets up the printing presses, was a great advance over the old system, which required print workers to assemble plates of individual letters from the journalists' draft typescript.

This technological innovation dramatically improved both labour productivity and technical quality in the newspaper industry, but by fundamentally altering the functional nature of the jobs involved, its introduction proved very disruptive, culminating in the protracted and bitter |Wapping' dispute between the print workers' union and the Murdoch newspaper company in the mid-1980s.

Part of the difficulty stemmed from the fact that the computerisation of the print-setting operation in the newspaper business transformed what had been a manual job done by skilled print workers -- represented by their own craft union -- into a job which could be done directly by journalists, supported by electrical engineers to maintain the new equipment. The print workers' union was thus bound to defend the position of its members against the effects of the changes which, given the intransigence of the employer concerned, resulted in prolonged strike action.

The Conservative Government's argument is, therefore, that since economic growth necessarily involves continuously re-defining workers' jobs and functional responsibilities, old craft-based trades unions which have a duty to protect the jobs of their membership from structural change inhibit research and investment in new products and processes. Ministers point to the temporary surge in labour productivity, which accelerated to almost five per cent per annum during the 1980s following a period of stagnation in the previous decade, as evidence that by restoring the |power to manage' to employers, their legislative reforms bad allowed wasteful overmanning to be eliminated and new, labour-saving technologies to be introduced. Anecdotal stories certainly abound of the |new realism' in industrial relations, with unions reportedly fighting to sign innovative |single union' deals which embody complete labour flexibility.

An alternative interpretation of the Government's labour market reforms, however, is that while they have indeed succeeded in creating a more flexible labour market, in the sense that unions are now much weakened and it is very much easier for employers to hire and fire staff, this |success' may ultimately prove counterproductive in terms of the economy's longer term growth prospects. For although the legislation has tilted the balance of industrial relations in favour of employers, allowing them to tear up demarcation agreements and drive through a raft of productivity-improving changes in work practices that would have formerly been resisted by unions, it has also reduced the incentive for firms to invest in their own staff.

The outcome of a decade of legislative reform has been, in effect, to create a more vibrant |external labour market', in which employers buy and sell labour amongst each other; that is, the national and regional labour pools into which firms dip whenever they are short of staff and into which they pour unwanted employees. The unintended and unwelcome corollary, however, has been a withering of the |internal labour market'; that is, the |in-house' pool of labour which firms manage via training, staff development and the redeployment of staff. The weaker employer-union relations and the more liberal employment law, the less is the incentive for firms to retain and retrain staff and the easier it is to resort to the external labour market.

In Germany, for example, where the trade union movement is much stronger and where government legislation makes hiring and firing more difficult, internal labour markets are well developed. In Japan, lifetime employment contracts are commonplace. With employers prepared to retrain and upgrade the skills of their existing workforce in both countries, rather than discarding them in favour of better qualified outsiders whenever job specifications chance, there is no necessary conflict between job security and structural change; and, by implication, between union membership and structural change.

More serious, perhaps, is the fact that a strong external labour market militates against national investment in training and education. Firms have little incentive to pay for training if its workers are likely to move on after completion of expensive courses. Each company recognises that it is more cost-effective to wait for their competitors to train staff and then |poach' qualified employees by paying slightly above the going market wage for skilled jobs. Herein lies a fallacy of composition: what is true of the parts is not true of the whole. If each firm cuts expenditure on training and relies increasingly on the external labour market, the national pool of skilled labour will inexorably dry up.

This is precisely what has happened in Britain since 1979. On almost all measures of human capital acquisition, Britain now compares unfavourably with the other major economies. Britain has the lowest proportion of 16-24 year olds in further education and the least educated managerial class of all the major industrial economies. At an economy-wide level, British firms collectively undertrain staff, damaging their longer-term competitiveness. This growing weakness in the economy was highlighted during the boom of the late 1980s by the percentage of firms reporting that their expansion was constrained by their inability to recruit skilled staff, which rose to a peak of almost 30 per cent -- ten times Continental levels.

In other words, while the Government's legislation has allowed firms to rationalise methods of production, thereby yielding a temporary surge in productivity growth as wasteful demarcation arrangements were scrapped, these short-term gains have been bought at the cost of weakened long-term growth prospects. The increased strength of the external labour market, so long an objective of Conservative Government policy, is paradoxically exacerbating the |great British training scandal'.

To conclude, the Government's far-reaching reforms of the labour market have clearly been successful in a political sense, insofar as they have proved electorally popular. The |winter of discontent' in 1978-79 appears to have done lasting damage to the image of the union movement and there is little popular support for the wholesale repeal of the Government's new legislation. In an economic sense, the legislation has been less obviously successful. It is disingenuous in the extreme to argue, as the Government frequently does, that unions cause unemployment by |pricing their members out of jobs', since unions are simply demanding cost-of-living increases to compensate for the inflation that the Government was elected to control. More seriously, while its reforms have contributed to a greatly strengthened external labour market, this prize of greater labour market |flexibility' has been bought at the cost of a weakened internal labour market. Far from encouraging firms to see their staff as human resources to be managed and developed, the Government's reforms have reinforced the view that labour is a commodity to be dispassionately bought and sold for short-term profit, a development that bodes ill for the country's longer term economic vitality.


(1.) Union density is defined as the percentage of employed workers eligible for membership of a trade union who actually exercise this right and join a union.
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Title Annotation:analysis of the UK's labor market policies
Author:Healey, Nigel M.
Publication:Contemporary Review
Date:Dec 1, 1992
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