Why trade unions at work do work

Trade unions are often represented as slow-moving and ossified. Yet, as Sweden shows, they are key to adapting flexibly to a world of work in rapid flux.

In various international comparative studies—ranging from innovation to social equality—Sweden, along with the other Nordic countries, continually rises above the competition. This applies not only to welfare or social justice but also to conditions for business, as in the Forbes ranking of best countries in which to do it.

In an earlier report from our think tank, Futurion, Prof Jesper Strömbäck took a closer look at a range of indices, showing that Sweden ranked among the top five in most and the top ten in close to all. If we can dismiss the notion of magic in the Scandinavian water, we can assume the explanation probably lies in how the social system is constituted.

One of the social components common to the Nordic countries is a significant trade union movement. From previous studies, we know that strong unions contribute to better economic development and well-functioning labour markets.

This, among other takeaways, was confirmed in an Organisation for Economic Co-operation and Development report, Negotiating Our Way Up, which appeared at the end of last year. Also in 2019, Futurion published a report finding evidence that trade unions not only had positive effects on the economy as a whole but also on individual businesses, as well as on workers’ adaptability to a transforming labour market.

The Nordic model—combining economic efficiency with social benefits and a high incidence of collective bargaining—allows employers and employees to find solutions adapted to the varying circumstances of companies and industries. This creates greater flexibility than in labour-market systems where politicians regulate the conditions by law or where employers can freely determine the working conditions. And high union density helps to warrant the claim that agreements concluded meet the interests of workers as far as possible.

Counterfactual study

To gain a better understanding of the impact of trade unions, Futurion commissioned WSP, a professional services and analytics firm, to conduct a counterfactual study of what Sweden would look like if there never had been a trade union movement here. The report, Om Facket Inte Fanns (If the Trade Unions Didn’t Exist), examines this by looking into the effects on wages, income distribution, productivity and employment .

Perhaps unsurprisingly, the study shows that unions have the greatest impact on the wage share and income distribution. Our counterfactual analysis shows that the average Swedish worker would otherwise earn approximately €5,700 less a year. Compared with Sweden today, the top decile would see its income rise by around 11 per cent, while the other nine deciles would be worse off, as the average worker would see her income fall by some 13-15 per cent. Most of the income rises for the top decile would also in reality benefit the top 1 per cent, where most of the income comes from capital.

A growing number of actors are raising concerns over increasing inequality as a potential threat to democracy as well as economic development. And the unions play a central part in the fight against this. 

The effect of unions on productivity is more complex. Since strong unions contribute to a higher wage share, shareholders’ profits, in the aggregate, decrease. This could lead to lower investment and, in turn, lower productivity. At the same time, unions favour lower staff turnover and more satisfied employees, which on the other hand would boost productivity. 

An often-heard criticism of unions is that wage levels beyond the equilibrium between the supply of, and demand for, labour lead to higher unemployment. This affects those with the weakest position in the labour market, since it then doesn’t pay to hire the least productive workers.

Futurion’s study affirms these findings. The relationship is however not so clear-cut: strong unions (with high density and established dialogue with employer organisations) have proved to take greater social responsibility—initiating fewer strikes or other belligerent actions—than weaker ones. The Nordic labour market is characterised by responsible unions, which do not claim higher wages than the market and productivity growth can bear.

Countries with high union membership lack the extensive low-wage labour markets found in many contemporary countries where it is common for individuals to need a number of jobs to match their living costs. Even though our study shows that unemployment would likely be a bit lower without the unions, Sweden has the highest employment rate in the European Union, due primarily to higher female labour-force participation.

Successful model

This model for wage negotiating has led to a labour market characterised by few strikes, low inflation, relatively low unemployment and steady increases in real income for almost everyone. Before the late 1990s, when this model was adopted, Sweden had high nominal wage increases with repeated strikes, as well as high inflation and unemployment. The nominal wage gains were nullified by the inflation, meaning real incomes were stagnant. This shows that unions need to act responsibly if they want to protect the long-term interests of their members.

The historic success of the Nordic model is the main reason why the Nordic trade unions resist the proposal to introduce minimum wages throughout the EU. This is considered a step in the wrong direction, since it could be an infringement on a successful system where the social partners are independent of political decisions. Countries with a legislated minimum wage often have weaker unions, as these are transformed from strong social partners to weak lobbyists seeking favours from politicians.

Occasionally voices are raised that unions have played out their role or that they should be restricted in different ways. But many studies show unions contribute positively to the development of society. It is, therefore, no coincidence that the countries with the highest prosperity, the highest competitiveness and the most well-functioning democracy also have strong unions.

The labour market, as well as our working lives, is rapidly changing. In this, there are significant advantages to a flexible system where the social partners—the unions and employer organisations—can solve things together. It provides agility and security. At a time when security and a balance between working and social life are highly valued among young people entering the labour market, employers lacking collective agreements should reconsider this. Adhering to such agreements would not only make them more attractive for ambitious young people but would also help strengthen a well-functioning social model.

As we enter this new decade, the negative trend in union membership must turn—we urgently require a well-ordered labour market where the interests of the workforce are represented.