Can workers’ rights promote economic growth and stability? This paper from the Economic Policy Institute outlines the economic case for implementing the International Labour Organisation’s five core labour standards (CLS). It argues that enforcing worker rights results in higher economic growth and a better distribution of income.
Global growth is currently sluggish due to too much global capacity. Firms have too few customers, and so increase profits by holding down wages and benefits and relocating to countries with lower labour standards. This ultimately leads to falling prices, and people shop or invest less as debts grow and profit opportunities vanish. The lack of customers is partly due to the erosion of labour rights. In Japan, for example, savings rates remain high as uncertainty over employment grows with the end of lifetime employment contracts. With fewer safeguards for workers, increasing unemployment and deflation have dampened consumption.
This is also true of emerging economies that have deregulated labour markets to appease International Financial Institutions. Increased labour market flexibility tends to lower labour income, dampening consumption. This in turn often exacerbates problems created by financial and economic crises, keeping economies from growing faster for long periods of time.
The bulk of economic research on worker rights shows that the implementation of CLS is associated with significant increases in economic growth.
- Child labour and forced labour drive down wages for everybody. Easy access to cheap labour removes incentives to adopt new technologies, and children working instead of attending school impedes the growth of human capital.
- Labour market discrimination can impede effective matching between employers and workers, as jobs are not allocated on the basis of skills.
- Unionisation gives workers a voice to management, making it more likely that conflict will be resolved through negotiation. It also reduces turnover, making it more likely that workers will develop job-specific skills, thus increasing productivity.
- OECD data demonstrates that on average, economic growth and growth in manufacturing have increased after the adoption of CLS. Export growth has fallen, but this may be due to a reorientation towards increased domestic demand.
Worker rights are not a luxury to be obtained after a certain threshold of development, but are crucial to starting on the path to strong and stable economic growth. Not only can they encourage economic growth, they can also distribute the benefits of growth more equally, and mitigate the effects of economic crises:
- Worker rights give a voice to more people at both company and national levels, providing a check to the narrow interests of elites. A World Bank study in 2003 found that union density and bargaining are positively correlated with more equal earnings distribution.
- Strong growth, which is equitably distributed, strengthens domestic demand. Wage earners at the low end of the scale spend more of their wages than those at the top. Hence, labour standards can provide a stable, robust element to domestic demand.
- Nations that pursue policies to promote domestic demand are less subject to external shocks. Also, firms are less likely to have problems of overcapacity if domestic demand is strong: These problems are often driven by ‘easy money’ from capital inflows, which can be withdrawn by investors if they think profits will not be forthcoming.
- Banking and currency crises are much less likely to occur in nations with strong commitments to worker rights. Despite the many intermediating factors between labour standards and financial stability, the relationship has been found to be robust and significant.
