Andrew Leigh

PAY SLIPS AND THE FATES OF THE UNIONS

The Saturday Paper, 3 November 2018

In the late-1700s, one of the most dramatic transformations in world economic history took place. In previous centuries, economic growth had puttered along so slowly that shops would sometimes carve their prices in stone on the wall. Starting in Britain, the Industrial Revolution saw production move from hand work to mechanisation. Steam-powered factories massively increased the output of textiles. With the industrial revolution, output per worker began to surge.

Yet for the first half century after the Industrial Revolution began, most of the benefits did not flow to workers. Productivity rose, as workers used the new technology to produce more output. But real wages barely budged.

There are various theories as to why this changed, but it is difficult to escape the conclusion that it had something to do with collective action. In 1833, six agricultural labourers in Dorset swore an oath to stand together against attempts to cut their pay from seven shillings a week to six. The Tolpuddle Martyrs were convicted of swearing a secret oath, and transported to Australia. After a mass public outcry, they were pardoned. From the factory to the farm, workers kept pushing for the right to organise and strike. Eventually, workers began to get a fair share of the productivity gains, and the Industrial Revolution became a major driver of better living standards across the world.

184 years after the Tolpuddle Martyrs swore their oath, Margaret Peacock and her fellow workers went on strike. Margaret worked at Australian Paper, the nation’s largest envelope manufacturing plant. She earned $21 an hour. Their union, the Australian Manufacturing Workers Union, had gone to the Fair Work Commission three times. They were asking for a pay rise of 2.5 percent a year over three years – zero real wage growth. The company was offering a deal that averaged 1.6 percent – a real pay cut. Only after an eight week strike did Australian Paper agree to the workers’ pay claim.

Over the past six years, real wage growth has all but ground to a halt. Just as in the first fifty years of the Industrial Revolution, productivity is growing at a solid rate. But employees’ share of the national pie has been shrinking.

Part of the explanation lies in the fact that just 13 percent of Australian workers are in unions, down from half the workforce in the early-1980s. Trade union membership is lowest among private sector workers (9 percent), 20-somethings (9 percent), recent migrants (5 percent), and people who have been working for less than a year (5 percent). My own long-run series in Battlers and Billionaires suggests that we have to go back to 1904 to find a time when the union membership rate was lower than it is today. Little wonder that the share of Australians who say that unions have too much power fell from 82 percent in 1979 to 47 percent in 2016, while the proportion who are concerned about the power of big business has risen.

We tend to think of the United States as having a famously low union membership rate. But in 2017, the US union membership rate was 11 percent, only 2 percentage points below ours. Twelve US states have a higher union membership rate than Australia, so if you find yourself in California or New York, Connecticut or Hawaii, you’re more likely to bump into a union member than you are in Australia.

What caused union membership to fall? Part of the answer lies in changing laws. The abolition of closed shop laws in the early-1990s, the anti-union WorkChoices legislation of 2006, and a myriad of small tweaks by conservative governments that made it harder for unions to organise. The structure of the economy has also tilted the scales against organised labour. Union membership is typically higher among full-time workers, in manufacturing and in the public sector. Analysis by Griffith University’s David Peetz suggests that changes in the economy explain a significant portion of the drop in union membership, especially during the early period of the decline. There is also a feedback loop problem: workers appear less inclined to join a union in highly unequal workplaces.

To see why this matters for Australia, it’s worth reviewing the achievements of the union movement. Sick leave in the 1920s. Annual leave in the 1930s. The eight hour day in the 1940s. Unfair dismissal protection in the 1970s. Banning asbestos in the 1980s. The weekend. Paid public holidays. Long service leave. Unions have often found themselves on the right side of history. Maritime unions refused to load ‘pig iron’ onto Japanese ships in the late-1930s because they foresaw the risk that it would come back in bombs. If you’ve ever enjoyed Centennial Park and the Sydney Botanic Gardens, then you might thank the union members who stopped them being destroyed in the 1970s.

And that’s before we get to inequality.

From 1975 to 2016, real wages rose by 74 percent for the top tenth, but just 24 percent for the bottom tenth. If low wage earners had enjoyed the same percentage gains as those at the top, they would be $16,000 a year better off. Since the early-1980s, household income inequality, wealth inequality, and top income inequality measures have all risen. The number of billionaires on the Australian Financial Review’s Rich 200 List grew from 60 to 76 last year, and the combined wealth of the top 200 rose by a whopping 21 percent.

Across the world, unions are one of the most powerful forces for boosting equality. Unions have a long history of lending their strongest voice to their lowest-paid members; identifying those most in need, and making their case. We can think of raising earnings of the lowest-paid as ‘flow up’ economics – a theory that has a good deal more empirical support than the discredited notion of ‘trickle down’.

Today, we take for granted that employers should not be legally allowed to pay people less because of their race or gender. But it took unions to fight for that change. Unions filed claims in the mid-1960s to remove racially discriminatory clauses from the Pastoral Industry and Station Hands Awards. It was the Australian Council of Trade Union’s Equal Pay Cases of 1969 and 1972 that led to the removal of institutionalised gender pay discrimination from industrial agreements.

Today, wage stagnation is hurting the economy. As the Reserve Bank’s most recent Statement on Monetary Policy observes, ‘Weak growth in household income has posed a risk to the consumption outlook for some time. Consumption could be particularly sensitive to unexpected weakness in income given the context of high household debt.’

Short-sighted businesses want low-paid workers and high-paid customers. Farsighted businesses recognise that workers and customers are the same people. If you want to boost retail sales, putting cash in the hands of the lowest-paid workers is the best strategy.

You don’t need to march under the Eureka flag to see that there’s a problem. The Bank of England’s chief economist Andy Haldane has noted that Britain has seen a growth in self-employment, temporary work, zero-hours contracts, and non-union jobs. Haldane argues that this makes work more ‘divisible’ than in the past, and has reduced workers’ bargaining power.

One recent study finds that unions increase wages by 5-10 percent. That suggests that if Australia today had the same union membership rate as in the early-1980s, average wages could be up to 4 percent higher.

Economist Saul Eslake contrasts the situation now with the economic circumstances Australia faced in the late-1970s. Back then, real wages were accelerating faster than productivity. Economists dubbed the situation the ‘real wage overhang’. The solution was the Accord: an agreement that promised wage moderation in exchange for improvements in the social wage.

Now, the problem is reversed. Australia is experiencing a ‘real wage underhang’. Workers have failed to get their share of productivity growth. If unions are relegated to the margins, and the safety net is eroded, then not only will low-paid workers suffer, but so too will our economy as a whole.

Part of the answer to boosting wages must lie in improving our industrial laws. Collective action has been behind many of the significant improvements in pay and conditions for Australian workers. Today, there are straightforward measures we can follow. Reversing the cut to Sunday penalty rates for 700,000 workers. Tackling sham contracting and dodgy phoenixing. Ending the oxymoron of ‘permanent casuals’. Preventing labour hire being used to erode earnings by legislating the simple principle: same job, same pay.

Recognising that firms serve society as a whole isn’t just a more equitable, but more sustainable. And in the long-run, it’s likely to leave us less vulnerable to the boom-and-bust cycle. Stronger unions, better wage growth, and fairer firms are the recipe for a more prosperous society.

Andrew Leigh is the Shadow Assistant Treasurer, and a former professor of economics at the Australian National University. He is the author of several books, including ‘Battlers and Billionaires’, ‘Choosing Openness’ and ‘Randomistas’. This article draws upon a speech delivered at Per Capita in Melbourne.

Authorised by Noah Carroll, ALP, Canberra.