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Economies Perform Better In Coordinated Labor Markets

Available in: Español, Français
Press Release No:2003/211/S
Media Contacts:        
Washington
- Phil Hay (202) 473 1796
( 202) 409-2909 –cell  
Phay@worldbank.org

Stevan Jackson  (202) 458-5054- office
(202) 437-6295 cell
Sjackson@worldbank.org

 

WASHINGTON, D.C., February 12, 2003—Workers who belong to trade unions earn higher wages, work fewer hours, receive more training, and  have longer job tenure on average, than their non-unionized counterparts,  according to a new World Bank study on  the effects of unions and collective bargaining in the global economy.

On the other hand, temporary layoffs can be more frequent in unionized firms. At the macroeconomic level, high unionization rates lead to lower inequality of earnings and can improve economic performance (in the form of lower unemployment and inflation, higher productivity and speedier adjustment to shocks).

The new report—Unions and Collective Bargaining: Economic Effects in a Global Environment—says that union members, and other workers covered by collective agreements in industrial as well as in developing countries, get significantly higher average wages than workers who are not affiliated with a trade union. The wage markup can be larger in the United States (15 percent) than in most other industrial countries (5 to 10 percent). In developing and middle-income countries, the markup can be higher or lower. For example, it appears high in Ghana, Malaysia, Mexico, and South Africa but relatively low in the Republic of Korea (in 1988, before the expansion of unionism).

Other notable findings include that union membership reduces wage differences between skilled and unskilled workers and also between men and women.  In some countries such as Germany, Japan, Mexico, South Africa, and the United Kingdom, unionized women workers have a greater pay advantage over their non-unionized counterparts than unionized men. In the United States and the United Kingdom, unionized non-white workers tend to get a higher wage markup than white workers, although the U.S. evidence is mixed. In South Africa, “black” unions are associated with a smaller markup than “white” unions. In Mexico and Canada, unions have been found to reduce the discrimination against indigenous people.

Globalization renews interest in labor standards 

The report, which reviewed more than a thousand studies on the effects of unions and collective bargaining, finds that bargaining coordination between workers’ and employers’ organizations in wage setting and other aspects of employment (for example, working conditions) is an influential determinant of labor market outcomes and macroeconomic performance.

Countries with highly-coordinated collective bargaining tend to be associated with lower and less persistent unemployment, lower earnings inequality, and fewer and shorter strikes than uncoordinated ones.  In particular, coordination among employers tends to produce low unemployment.  In contrast, fragmented unionism and many different union confederations are often associated with higher inflation and unemployment. 

By formalizing the labor relationship, workers, employers, and governments can  use collective bargaining at the national level to provide insurance against shocks arising from international markets.  In fact, countries that are more exposed to external risks (such as openness to international trade) tend to have more compressed wage structure, more centralized systems of collective bargaining and a higher relative minimum wage. 

Sound industrial relations can lead to a stable economy and prevent disruption to national life.  According to Mamphela Ramphele, Managing Director at the World Bank,  "Coordination among social partners can promote better investment climates while also fostering a fairer distribution of output".

“The need for workers, employers, and government to find solutions that cut poverty through both growth and better distribution of income is becoming increasingly urgent in an era of globalization,” says Robert Holzmann, the World Bank’s Director of Social Protection, who commissioned the new study to provide policymakers, unions, and employers in developing countries with the most recent, comprehensive research on the economic effects of trade unions and collective bargaining. Holzmann says in firms where industrial relations are of a “high” quality (in terms of a low number of unsolved grievances, low strike activity, and so on), the presence of unions tend to increase productivity levels.

The International Labour Organisation (ILO) defines four core labor standards: (1) the progressive elimination of child labor, (2) a ban on the use of forced labor; (3) non-discrimination in employment; and (4) the right of freedom of association and collective bargaining.

One of the driving forces behind the current interest in labor standards around the world is the rapid expansion of international trade and the liberalization of financial markets that has occurred during the past decades. As globalization proceeds, differences in labor standards between countries and regions arguably become more important than they used to be. There is a concern that these differences could produce unfair advantages in internationally traded goods for countries that adopt lower standards, and also because new technology now allows jobs to be directly subcontracted to workers in low-standard countries.

For example, workers in the Caribbean carry out extensive data entry work for U.S.–based companies and transmit the finished product back to them electronically. Another example is the work carried out by skilled Indian engineers who receive initial drawings from American companies by satellite and send the final blueprints back to the United States in the same way.  New figures suggest that the export revenues of India's software services market reached $6.2 billion last year, up from under $500 million in the mid-1990s.

“ When you see technology transforming the global workplace in such dramatic ways, it becomes clear that labor standards can no longer be the concern of just individual governments but also of the entire international community,” says Zafiris Tzannatos, co-author of the new report, and a World Bank authority on social protection issues,  including labor markets and child labor. “You also need international engagement around labor standards because individual countries often have very different views on what constitute proper standards and what the consequences of adopting them might be.”

A recent OECD study which attempted to analyze the  effects of labor standards, identified countries that have undertaken major labor market reforms in the areas of freedom of association and the right to collective bargaining, and then to compare the performance of the economy before and after the reform.

Using this approach, the OECD report identified 17 countries that  undertook significant labor market reforms over the past 20 years and compared the average growth rate of GDP, manufacturing output, and exports in the five-year period before and the five-year period after the reforms. The cross country variation of results was significant, for example, growth rates in Panama increased by as much as 8 to 10 percentage points after the reform, whereas export growth in Peru collapsed.  On average, GDP grew at 3.8 percent per year before the improvement in labor standards and at 4.3 percent afterwards. Growth in manufacturing output remained practically the same.  In contrast, export growth declined by 2.3 percentage points on average (from 6.6 to 4.3 percent).

The World Bank says that estimating the benefits and costs of labor standards depends on a given country’s competitiveness of product markets, political climate, the quality of its public institutions and the state of its workplace relations. There is no universal formula for measuring such complex norms in the global economy, and developing and transition economies must make their decisions based on their own local circumstances.

“ The precise link between adopting labor standards and economic performance is as yet not clear and many controversies remain, but the fact is that labor standards are now a prominent item on the international agenda and are likely to stay there for a long time to come,”  says the Bank’s Zafiris Tzannatos.

The World Bank and the Trade Unions

Research on unions and collective bargaining is part of the World Bank's work to support the promotion of core labor standards. While not conditional in World Bank lending, these standards are promoted by the Bank as important elements of a well-functioning labor market.  Promotion includes training programs for staff and counterparts in client country governments; the Global Child Labor Program; and work directly with trade unions.

The World Bank Group, in coordination with the IMF, has recently established a process for regular dialogue with the international trade union movement.   The dialogue includes biannual high level meetings with trade union leaders from around the world. The leadership meetings are complemented by a series of technical meetings on policy issues of interest to both parties, such as pension reform, privatization, and labor market regulation. The Bank is also working to improve consultation with trade unions within client countries.

The World Bank's work on labor standards and trade unions is carried out by the Bank's Social Protection Unit.  The goal of social protection interventions  is to assist individuals, households, and communities to better manage the risks that leave people vulnerable. Such activities include labor market interventions, unemployment or old-age insurance, programs to reduce harmful child labor, and support to orphans and vulnerable children. 

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