/ 12 March 2015

The IMF loves, but labour’s still lost

The IMF's distrust of labour is deeply entrenched despite the report's findings. Ask Greece.
The IMF's distrust of labour is deeply entrenched despite the report's findings. Ask Greece.


For years, you could take it for granted that, if the International Monetary Fund (IMF) ever said anything about trade unions, it would be negative.

Like the World Bank, the consensus of what passed for economic thinking over the past 30 years was that no good could come of the unions or a minimum wage.

Of course, little was ever said, as the IMF was about macroeconomic stability and balance in the global economy. Unions were a domestic matter for countries to address but, if you had the misfortune of sitting down to dinner with an IMF economist, you would almost certainly receive a long and tedious lecture on the sins of the minimum wage and the evils of trade unions. It was simple enough – both raised wages above market levels and therefore decreased the level of employment.

But in a stunning turnaround, two of the IMF’s research economists, Florence Jaumotte and Carolina Buitron, detail in the March issue of the IMF’s publication, Finance and Development, how important the demise of trade unions is in explaining the growth of income inequality in the developed countries.

Such a conclusion is hardly astounding but what is astounding is that it said it. To imagine that the IMF would say something positive about trade unions is almost in the domain of economic science fiction.

Many economists see the rise of massive income inequality over the past 30 years the world over, and the threat that it poses to political and economic stability, as a real impediment to the global economy.

Trade unions in developed countries used to be concentrated largely in the manufacturing and industrial sectors, and not in the government, as is more common in many developing countries.

But manufacturing and industry have declined as a result of globalisation and technical change. For example, in the United States, in 1950, one-third of the nonfarm workers, or 15-million, were in the relatively highly unionised areas such as manufacturing. But the number of these traditionally unionised blue-collar workers has declined dramatically over the past 60 years. In the manufacturing sector, employment was decimated between 2000 and 2010, falling from 17-million to 11-million.

The causes are fairly well known – increased technical efficiency and automation, globalisation and the shift of production to China and Mexico, and the devastating effects of the 2008 global economic crisis.

With manufacturing employment in decline and a string of anti-labour governments, from Ronald Reagan (who was pro-labour in Poland but viciously anti-labour at home) to George Bush Jr, unionisation rates fell from 20% of the labour force at the beginning of the Reagan era in 1982 to 11% in 2014.

The consequence is that unions, which were traditionally an important political force speaking for the direct commercial interests of workers, no longer have the numbers, resources and political clout to do so.

What the IMF researchers have shown is that, even correcting for the technological changes and globalisation, about half of the increase in the wealth of the richest 10% of the global population can be explained by the demise of unions and the decrease in their power and influence in developed countries. First and foremost, unions helped to raise wages in general and the minimum wage levels in particular. But, perhaps just as importantly, the unions could oppose the policies of the wealthy national elites.

What is driving this apparent change in the IMF? Has it suddenly, under the leadership of Christine Legard, gone soft and fuzzy?

Hardly. In the Greek bailout negotiations, the IMF has been as brutal as ever about the interests of workers. The world has changed since the period of high globalisation, which peaked in 1995, with the signing of the Uruguay round of trade agreements and the creation of the World Trade Organisation. The change in many of the organisations is also more than just cosmetic because the changed circumstances of the global economy post-2008 require a more nuanced approach to economic management.

But no one should be confused – these institutions have not changed. The IMF is there to protect the international monetary system as it stands, and there is not a market it has found that it does not love desperately.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he is affiliated.