IMF researchers: weaker unions result in greater income inequality

In Texas, unions recently defeated an attempt in the state legislature to weaken public sector unions.

In Illinois, unions won another victory in the state legislature when lawmakers soundly rejected a right to work for less bill proposed by Gov. Bruce Rauner that would have weakened private sector unions.

In Missouri, unions appear to be poised to win another fight. Missouri Gov. Jay Nixon said that he will veto a right to work for less bill passed by the state’s legislature.

Successful fights like these, however, are essentially rear guard actions.

Since capital revived its war on unions in the 1980s, unions have been retreating, and now union membership in the US is at its lowest point in the last 70 years.

To one degree or another, the same thing is happening in other countries with advanced economies.

At the same time, total income in these countries has been increasing, but the share of income going to the working class has remained stagnant.

The lion’s share of these gains has gone to those on the upper end of the income distribution scale–the 1 percent, or more precisely the 0.1 percent.

Mainstream economists have explained this rise of income inequality as a natural result of structural changes to the economy–for example, globalization and technological innovation.

But lately that explanation has come under closer examination.

Recently two researchers with the International Monetary Fund, Florence Jaumotte and Carolina Buitron, published an article in which they say that there is strong evidence that lower unionization is a major factor in the rise of income inequality.

Jaumotte and Buitron begin by referencing other researchers who have begun to question the role that structural changes to the economy have played in the rise of income inequality. These researchers are now focusing on the role played by institutional changes.

Jaumotte and Buitron examine the role of one institutional change–the declining power of unions–and then argue that the decline of union membership in countries with advanced economies over the last 30 years is a key reason that those at the top of the income distribution scale have seen their share of income increase while income shares for the rest of us has remained stagnant or declined.

During the same 30-year period, write Jaumotte and Buitron, “those at the top of the income distribution in advanced economies have enjoyed an increasingly larger share of total income, exacerbating inequality.”

According to the authors, strong unions play an important role in redistributing income more fairly at the point of production, and conversely, weaker unions “can increase top income shares by reducing bargaining power of workers. . . If deunionization weakens earnings of middle- and low-income workers, this necessarily increases the income share of corporate managers’ pay and shareholder returns.”

Weakened unions especially benefits those who receive their income by owning capital.

“The weakening of unions (also) reduces the bargaining power of workers relative to capital owners, increasing the share of capital income–which is more concentrated at the top than wages and salaries.”

Strong unions also play an important role in formulating government policy about how income is distributed.

“Strong unions can induce policy makers to engage in more redistribution by mobilizing workers to vote for parties that promise to redistribute income or by leading all political parties to do so,” write Jaumotte and Buitron.

Weaker unions, conversely have less influence on government policy decisions.

Another way that strong unions make income distribution more fair is by influencing corporate decisions on matters such as top executive compensation.

The authors conclude by observing that “the decline in unionization appears to be a key contributor to the rise of top income shares. This finding holds even after accounting for shifts in political power, changes in social norms regarding inequality, sectoral employment shifts (such as deindustrialization and the growing role of the financial sector), and increases in education levels.”

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