Labor Strength & Globalization: Why Do More Open Economies Have Stronger Unions?

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Abstract

A well-established line of reasoning in the literature on globalization claims that governments compensate (potential) losers of globalization, thereby making globalization politically feasible (Cameron 1978; Katzenstein 1985; Rodrik 1998a; Ruggie 1982). These arguments come against the backdrop of globalization induced cross-national increases in wealth (Dollar 1992; Dreher 2006; Edwards 1998; Sachs et al. 1995; Vamvakidis 1998) on the one hand and an increase in economic inequality within states (Burtless 1995; Dreher & Gaston 2008; Gozgor & Ranjan 2017; Heimberger 2020) on the other. In order to reduce insecurity and to increase approval for economic openness, governments enact compensation policies. In political science, this mechanism is described as the compensation hypothesis according to which welfare state benefits and compensation mechanisms more generally increase with globalization (see, for many, e.g. Hays 2009).

This paper adds the aspect of labor union strength to the argument of an influence of compensation payments on economic openness. We maintain that the political feasibility of both openness and further liberalization of foreign economic relations requires political support that has to rely on a coalition of ex-post winners of globalization. In order to increase the size of this winning coalition, governments need to be able to reduce ex-ante uncertainty by credibly committing to ex-post compensation of globalization losers. While depoliticized welfare state provisions are one way to reduce the government’s credible commitment problem (Hays 2009), proportional electoral institutions are another way to increase the credibility of the compensation commitment (Rogowski 1987; Martin & Steiner 2015). To these, we add labor union strength as a commitment device that makes globalization politically feasible.

We argue that labor unions cushion blows to an individual’s earning potential in an environment after a globalizing policy change by constraining wage decreases on part of the employer. If sectors become less competitive due to globalization, trade unions support upskilling of employees in these sectors or, in the case of labor force reduction, will advocate and in some cases mandate generous unemployment compensation together with active labor market policies. Taken together, labor union strength reduces individual ex-ante uncertainty on the part of the electorate by making compensation mechanisms both more credible and more attractive which in turn increases the size of a winning coalition that supports foreign economic liberalization.

Our argument runs counter to an established narrative about the relationship between labor union strength and globalization. Globalization is frequently found to be negatively correlated with union strength (Dreher & Gaston 2007; Lee 2005; Piazza 2005; Vachon et al. 2016). The argument that backs this empirical evidence is that globalization transforms employment conditions and shifts the balance of power more strongly towards the side of the employers. This happens, for example, by turning the threat of relocation into a realistic danger (the bargaining power decreases), by making it easier to substitute workers with each other (demand becomes more elastic), and by making wages and employment relationships more vulnerable to external shocks (volatility and uncertainty increase) (cf. Rodrik 1997, 4-5).

By contrast and based on the compensation hypothesis literature, we argue that the demand for protection increases with globalization, due to consecutive symptoms described before, and that labor power can strengthen the compensation claims of the state. We assess this reasoning by introducing a new indicator of labor power, the Collective Labor Force index (CLF), which overcomes the flaws of the commonly used indicator of union density. Using quantitative data at the macro level for 72 countries from 2000 to 2016, the results indicate that certain measures of labor union strength are positively related to globalization. Specifically, and controlling for standard variables, while the common labor union density indicator used in many studies is not significantly related to measures of globalization, the Collective Labor Force index and its sub-indices exhibit a positive and highly significant influence on globalization.

Our findings add to the discussion about the compensation hypothesis by showing the importance of an additional institutionalized credible commitment device beyond the welfare state and proportional electoral institutions. Furthermore we challenge a globalization narrative that sees strong labor unions as an impediment to globalization rather than a potential ally in achieving welfare maximizing policy outcomes. Thirdly, we show that established standard measures of labor union strength miss important aspects of the political economy of unions in a globalized context.

Authors

• Christian W Martin, New York University

• Anne Metten, University of Kiel

• Nils Steiner, Johannes Gutenberg University Mainz