Decline of trade unions since the 1970s may have led to the rise in inequality

The rise in inequality in the advanced economies may at least in part be because of the decline of trade unions, a recent National Bureau of Economic Research (NBER) working paper by Henry S. Farber, professor of economics at Princeton University, and co-authors suggests. Using data on US households’ union membership captured by opinion polls since 1936, the authors find that union workers often enjoyed a wage “premium”, i.e. they earned higher wages than non-union workers of similar skills. Thus, as unions expanded, absorbing more low-skilled workers, the relative wage of low-skilled workers rose vis-a-vis the more skilled ones. This led to a narrowing in the gap between wages of high-skilled and low-skilled workers in the decades following the Second World War and hence reduced inequality.

However, the trend has reversed since the 1970s with falling union membership. Moreover, it is the relatively higher-skilled workers who have remained in unions and have been able to enjoy a union wage premium. This has led to widening inequality in recent decades. The authors argue that the smaller size of present-day unions is similar to the pre-World War II era when unions were composed mostly of skilled workers. This explains the U-shaped pattern of US income inequality in the 20th century.

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The declining power of unions since the 1970s has been accompanied by rising power of big corporations, which have successfully lobbied to reduce taxes. Such tax cuts may have exacerbated inequality, another NBER working paper by Suresh Nallareddy, assistant professor at the Duke University Fuqua School of Business, and co-authors suggests. Studying changes in corporate tax rates in US states, they find that a tax cut of 0.5 percentage point accounted for about 12.4% of the average rise in share of income accruing to the top 1% between 1990 and 2010. The benefits of tax cuts primarily accrue to the wealthiest taxpayers who are able to shift their income from salary to capital income to reduce their tax liabilities.

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A growing number of older people are choosing to work in the developed world and this might have little to do with improved health and education, according to a new research paper by Courtney C. Coile, professor at Wellesley College, and co-authors. A study of twelve advanced economies showed that labour force participation rate (LFPR) among older people – both men and women – has been rising since mid-1990s, reversing years of prior decline. One reason for this is social security reforms which have raised the age for retirement benefits in several countries. Another reason is the increase in work by older women. Since married couples often prefer to retire at the same time, this also tends to push up the retirement age for men.

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Public sector programmes in the developing world often falter because of a nexus between government employees and politicians, according to a new World Bank paper by Tessa Bold, assistant professor at the Institute of International Economic Studies, and co-authors. Public servants can influence how government schemes are implemented and which groups benefit from them, potentially impacting the re-election chances of politicians. The authors discuss various ways to counter this problem and suggest paying closer attention to local power dynamics.

ALSO READ: Clientelism in the public sector : Why public service reforms fail and what to do about it

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