Public Issues
www.lyd.org- Email:[email protected]
No. 845 - November 9, 2007
ISSN 0717-1528
Knocking Down Myths on
Labor Institutions
The labor market’s operation is a very
important matter and; therefore, it should not
surprise us that its evolution is studied and its
regulations revised time after time. It is
important; however, for the analysis to have
clear objectives and that the best instruments
are used to reach such objectives.
One of the proposals that
is currently in the public debate
is making collective bargaining
compulsory
beyond
the
company sphere. In this paper
we postulate that the best
system is that in which salaries
adequately reflect the workers’
productivity and; therefore,
favor employment
More and better work
opportunities dignify and offer
the individual greater well.
Salaries and Productivity
•
The unemployment rate is low and is
not maintained.
•
The labor force is highly productive.
Collective bargaining seeks to obtain a “fair”
salary; in other words, a salary that best
reflects the relationship between what the
employee obtains for his/her
work and his/her productivity.
Conversely, if the salary is
The evolution of real salaries higher than productivity, the
in Chile shows that they have
employment of all company
grown in line with
workers is put at risk because
productivity. In addition, the
the company will not be able to
union affiliation rate in Chile
survive in the long term. Thus,
is Chile is higher than in the
that salary is not fair.
United States, France and
Poland. Therefore, it is an
error to promote a change in
collective bargaining to
increase union affiliation rates
or removing collective
bargaining from the company
sphere. The task consists of
increasing workers’
productivity.
If we analyze the relationship
between the growth of real
salaries and of productivity for
the 1987-2006 period (Chart
No. 1), we see that both
measures are similar. The
figures show that as a result of
negotiations, the strengths are
reasonably balanced. The real
salaries that workers get grow
hand in hand with productivity.
There will be periods when salaries grow more
and in others when productivity will grow with
greater strength.
Some sectors suggest
that
greater
collective
bargaining centralization is
needed
to
balance
the
negotiating power between workers and
employers, thereby obtaining better work
conditions and increasing the workers’ well
being.
The figures talk for themselves; both
salaries and productivity grew on average
about 3% in the 1987-2006 period.
The literature defines that a labor market
is efficient if1:
• Jobs are easily created.
In this issue:
•
•
Knocking Down Myths on Labor Institutionality
The Chávez Networks in Chile
1
Chart No.1
Productivity and Salaries Growth Rate in the
1987-2006 Period
unemployment of other workers, who are
normally the least qualified and skilled
workers.
The negative effects of removing collective
bargaining from the company sphere and
taking it to a more centralized level have been
8%
Productivity Growth
dealt with in the literature. A study conducted
by Bierhanzl E. and Gwartney J. (1998)2 for
6%
different OCDE countries shows that greater
4%
centralization in salary setting has negative
effects on unemployment rates; Bertola, G. et
2%
al.(2002)3 found that countries whose labor
0%
unions have greater influence on salary
Real Salaries Growth
setting, tend to have lower employment rates
-2%
19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20
both for young and older workers. They also
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
found that those countries are characterized
for having higher female unemployment
Note: Productivity is measured as the product variation per
worker. This assumes that the average product is equal to the compared with male unemployment.
10%
marginal product.
Source: Employment data was taken from the INE series whereas
product data was taken from the Central Bank series.
To measure the increase in salaries, the INE 1982-1993, 19932000 and 1993-2006 salary series were joined to the January
2006 base.
If we simply want to increase salaries
without taking other aspects into account, we
face great danger. It is widely known that in the
long term, productivity must grow at the same
pace than salaries and that the relationship will
return to a balance. However, when
maladjustment occurs, with salaries growing
more than productivity, the ways to return to an
equilibrium are different and some may very
costly.
In Chile we see that during the periods
when the real salaries has grown more than
productivity, unemployment rates are higher
(Chart No. 2). This makes us think about the
significant risk represented by formulas that,
before increasing the share of work in the
product, generate transfers from the
unemployed to other employed, protected
workers.
If we want to improve the Chilean
workers’ labor conditions, and considering that
salaries, in general, seem to grow in line with
productivity, the path to follow must be
strengthening the measures aimed at
increasing productivity. That means adequate
public policies to train workers and reforms to
improve the quality and coverage of education.
The labor markets can adjust themselves
via salaries or via employment. The Chilean
experience has shown that in our case the
adjustment mechanism has been employment.
In periods of recession or negative shocks,
salaries have not been significantly affected,
but instead they have remained outside of the
equilibrium, thanks to regulations that restrict
flexibility. The other side coin of the high
salaries that some workers earn, is the
Low labor union affiliation rates?
A second argument to justify regulation
changes is the low union affiliation rate in Chile
compared with other countries. It is
unreasonable to set the objective of increasing
the number of workers who are affiliated to
labor unions in itself; that rate must be as high
as the workers want it to be and there is no
2
members. In France, for example, being a
union member implies a strong commitment,
whereas in other countries workers are
exclusively required to pay their monthly fees.
Chart No. 2
Unemployment, Productivity Growth and Salaries
10%
Productivity Growth
9%
Real Salaries Growth
8%
Employment Rate
7%
6%
5%
4%
3%
2%
1%
0%
1993-1998
1999-2003
Note: The unemployment rate is the official INE measure and;
therefore, it excludes the emergency employment effect.
Productivity is measured as the variation of the product per
worker. This assumes that the average product is equal to the
marginal product.
The figures correspond to the average of each variable for
both periods.
Source: Employment and unemployment data were taken
from the INE series, whereas product data were taken from
the Central Bank series.
To measure the increase in salaries, the INE 1982-1993,
1993-2000 and 1993-2006 salary series were joined to the
January 2006 base.
evidence indicating that they wish to become
affiliated.
In a study conducted by Visser, J.
(2006)4, he suggests that to compare the
different union affiliation rates, many elements
have to be taken into account. The unions
differ in their actions, benefits, and in the way
they measure affiliation. There are countries
like Ireland and Great Britain where residents
in foreign countries are considered in the
unions. In other countries in Europe, most
union members are retired and are no longer
part of the labor market but they continue
registered to have access to some benefits.
Another variable that can make union affiliation
rates differ is the commitment required from the
The countries with the highest union
affiliation rates are the Scandinavian countries
and Finland. The labor unions in those
countries have been in charge of managing
unemployment insurance, they offer exclusive
tax benefits to their members, and they help
their members to find a job; therefore, the
members have considerable benefits from
such affiliation. In other words, the unions offer
social security and employment services. Other
nations like Australia, New Zealand and Great
Britain have high labor union affiliation rates,
but rates are steadily falling. This can be
explained because in the past workers were
required to be a member of a labor union or a
trade union in order to practice some
professions.
Using a methodology that permits making
valid comparisons between countries (Visser),
the labor union density rate is 15.6%. This
figure rises to almost 18% if we deduct the
large number of workers in companies with 9
or fewer workers, because the law requires at
least 8 affiliated workers to create a labor
union. Upon comparing these figure, we see
that a large number of countries have similar or
lower rates. Thus, the United States, France
and Poland have lower labor union affiliation
rates than Chile. Therefore, it is false to state
that the union affiliation rate in Chile is low. The
countries that show a different trend are those
where the labor unions manage the
unemployment insurance (Table No.1). If we
take these elements into account, we can
conclude that the Chilean labor legislation does
not penalize labor union affiliation rates.
Conclusions
The attempts to increase centralization of
collective
bargaining
lack
convincing
arguments to sustain that initiative.
3
If we go through the related literature, we can
see that countries that have implemented
changes in favor of greater centralization have
shown a regression in critical labor market
variables, mainly damaging the groups of
workers that are in more disadvantageous
positions.
Table No. 1: Labor Union Density Rates
Members of a Union compared
with Wage Earners
Countr
Chile
Denmar
Spain
United
Finlan
France
Poland
Swede
Union Density
15,6%
70,4%
16,3%
12,4%
74,1%
8%
14,7%
78%
Source: Visser, J. (2006), the figures for Poland are for
2001 and Chile’s figures were obtained from the Labor
Authority.
If we want to improve the salaries of Chilean
workers, the road is neither making the labor
unions more powerful nor promoting greater
labor union affiliation, but rather increasing
investment in education and training. That is
the only way of permitting salaries to grow
without high unemployment rates that leave
youths, women and the poorest individuals
outside the labor market •
1 Godin, Keith, M. Palacios, J. Clemens, & N.
Veldhuis (2007). “Measuring Labour Markets in Canada
and the United States: 2007 Edition” The Fraser Institute.
2 Bierhanzl, Edward and James Gwartney (1998).
“Regulation, Unions, and Labor Markets.” Regulation
21,3:40-53.
3 Bertola, Giuseppe, Francine D. Blau, and
Lawrence M. Khan (2002). “Labour Market Institutions
and Demographic Employment Patterns.” NBER Working
Paper Series.
4 Visser, J. (2006). Union Membership statistics in
24 countries. Monthly Labor Review. January
If we look at the real salaries in Chile, we
see that they have grown in line with
productivity.
That
confirms
that
labor
relationships are balanced.
4