External membership of unions

The ostensible reason for the violent crackdown on protesting students at Alighar Muslim University and Jamia Millia Islamia last month was the involvement of “outsiders” in these protests. In both cases, campus authorities claimed that student protestors had been joined by “outsiders” who had gone violent, which forced them to call in the cops.

And then the cops did what cops do – making the protest more violent and increasing the damage all round, both physically and otherwise.

I’m reminded of this case from a few years ago from some automobile company – possibly Maruti. The company had refused to recognise an employee’s union at a new plant they were starting, because of an argument on the membership of non-employees in the unions.

The unions’ argument in that case was that external (non-employee) membership was necessary to provide the organisational and union skills to the union. If I remember correctly, they wanted one third of the union to consist of members who were not employees of the firm. The firm contended that they wouldn’t want to negotiate with outsiders, and so they wouldn’t recognise the union with external members.

I don’t remember how that story played out but this issue of external membership of unions, whether student or employees, is pertinent.

At the fundamental level, unions need to exist because of the balance of power – the dominance in favour of an institution over an individual employee or student is too great to always produce rational outcomes in the short term (in the long term it evens out, but you know what Keynes is supposed to have said). The formation of unions corrects this imbalance since the collection of employees or students can have significant bargaining power vis-a-vis the institution, and negotiations can result in more rational decisions in the short term.

The problem I have is with external membership of unions. The problem there is that external members (who usually provide leadership and “organisation” to the unions) lack skin in the game, and the union’s incentives need not always be aligned with the incentives of the employees or students.

Consider, for example, the protests in the universities last month which became violent. The incentive of the protests would have been to peacefully protest (to register their dissatisfaction with a recent law), and then get back to their business of being students. The students themselves have no incentive to be violent and damage stuff in their own institution, since that will negatively impact their own futures and studies at the institution.

External members of the unions don’t share this incentive – their incentive is in making the union activities (the protest in this case) more impactful. And if the protest creates damage, that can make it more impactful. The external members don’t particularly care about damage to the institution (physical and otherwise), as long as the union’s show of strength is successful.

It is similar in organisations. It is in the interest of both the employees and the management that the company does well, since that means a larger pie that can be split among them. The reason employees organise themselves, and sometimes go on limited strikes, is to ensure that they get what they think is a fair share of the pie.

The problem, of course, is that negotiations aren’t that simple, and they frequently break down. The question is about what to do when that inevitably happens. Each employee has his own threshold in terms of how long to strike, and at what point it makes sense to back down and accept the deal on the table.

In an employee-only union, the average view of the employees (effectively) guides when the strike gets called off and the negotiations end. External members of the union lack skin in the game, and they have a really long threshold on when to back down from the strike. And this makes strikes longer than employees want them to be, which can make the strikes counterproductive for the employees.

One infamous example is of the textile mills in Mumbai in the late 70s, and early 80s. There was massive union action there in those times, with strikes going on for months together. Ultimately the mills packed up and relocated to Gujarat and other places. The employees were the ultimate losers there, either losing their jobs or having to move to another city. If the employees themselves had controlled the union it is likely that they might have come to a settlement sooner or later, and managed to keep their jobs.

In the automobile case I mentioned earlier, if I remember correctly, the union demanded that up to 33% of the membership of the union be comprised of outsiders – a demand the company flatly refused to entertain. Now think about it – if external members control a third of the union, all it takes is one fourth of the employees, acting in concert with the union, for something to happen. And there is a real agency problem there!

Unions and competition

I completely fail to see why workers’ unions are against competition in the sector. The latest round in this comes from the National Federation for Indian Railwaymen (NFIR), which represents most of the workers in the Indian Railways, which has slammed the Bibek Debroy report on railway restructuring claiming that the report seeks to bring in privatisation into the sector.

Business Standard reports (emphasis mine),

While Debroy has sought to define liberalisation separately from privatisation in the report, he has also said the entry of private players into the system is already provided by extant policy. fear any effort at bringing in private players into railway operations would jeopardise the workers’ jobs and negatively impact railways’ financial health

That private players coming in to railway operations could jeopardise jobs simply defies logic. Currently, the sector has a monopoly employer, namely Indian Railways, and this limits the bargaining power of any worker. With the coming of more (private) players, the demand for skilled workmen is only going to increase, and any new players would be much better off recruiting existing employees of the railways who are experienced in this business than recruiting from elsewhere.

So the coming of private players can only be a good thing from the point of view of workers.


However, what is good for the workers is not necessarily good for workers’ unions. The NFIR is a powerful union, representing 80% of the Railways’ 1.3 million employees (source: Business Standard report quoted above), or about a million employees. With the coming of private players, this number is surely going to go down (thanks to workers leaving, etc.) and this surely cannot be good news for the unions.

In other words, what is good for workers is not necessarily good for unions, and vice versa. And it is important to take this into account while making policy. In popular discourse, workers’ welfare and workers’ unions’ welfare get conflated, leading to policies that are pro unions but (they have higher bargaining powers) but not necessarily pro workers.

Recognition of this distinction can lead to much superior public policy.

The fundamental problem with the world economy

… is that wages are sticky.

With increased globalization, it has become significantly cheaper to produce certain goods and services in countries that were hitherto “low income” or “less developed’ or whatever you call it. In the past, in part due to protectionism at various levels and in part due to high transaction costs (transport, communication, etc.) “developed economies” such as the US or Europe had got adjusted to a reasonably high wage structure. In fact, it is possible that in the absence of trade with the rest of the world these countries might still be able to support that structure.

However, with the walls of protectionism and transaction costs falling, these traditionally high wage economies haven’t been able to compete with the up and coming economies where production costs are significantly lower. And because wages are sticky, i.e. it is impossibly hard to cut wages across the board, this has resulted in unemployment. Worse, a lot of other benefits (such as Social Security or Medicare in the US) have been set based on the high wage structure these countries used to enjoy.

And then you have unions, which makes it even tougher for you to cut wages which might make you competitive. It’s a combination of sticky wages and unionism that the various austerity measures in Greece haven’t managed to go through (of course, Greece has another set of problems in terms of law enforcement and tax collection).

And so, in short

1. Wages are sticky. Even though your current wages are not competitive enough, you can’t cut wages

2. That leads to high unemployment

3. That leads to lower economic activity and thus depression

4. The government needs to spend more to “stimulate” the economy, but hasn’t collected enough in good times. And the “level” of the economic cycle itself has gone down now. And the government itself has other obligations linked to the high wage levels

And so it goes. One thing I can think of is “devaluation” (in these times of floating currency rates, that term has lost all meaning), but then now these countries import so much that will again not be a good idea.


PS: please note that this post has been filed under “Arbit”