Economics Essays

When Mrs Thatcher came to power in 1979, her stated aim was to reduce the power of unions. She felt that unions were a major contributor to the declining competitiveness of the UK economy. To a large extent Mrs Thatcher was successful in reducing the power of unions. However, it is worth considering whether unions are necessarily the demonic forces that some commentators have made them out to be.

Advantages of Trades Unions.

1. Increase wages for its members.

Industries with trade unions tend to have higher wages than non-unionised industries.

2. Counterbalance Monopsonies.

In the face of Monopsony employers, Trades Unions can increase wages and increase employment. Monopsony employers are those who have market power in setting wages and employing workers. Traditionally, monopsonies occur when there is only 1 firm in a town, or type of employment. However, in modern economies, many employers have a degree of market power (monopsony).

3. Represent Workers

Trades Unions can also protect workers from exploitation, and help to uphold health and safety legislation. Trades unions can give representation to workers facing legal action.

4. Productivity deals.

Trades Unions can help to negotiate productivity deals. This means they help the firm to increase output; this enables the firm to be able to afford higher wages. Trades unions can be important for implementing new working practices which improve productivity.

5. Important for Service Sector.

Modern economies have seen a fall in trade union power. This is because of a decline in manufacturing and rise in service sector employment. Service sector jobs tend to more likely to be part time and temporary; unions are needed to protect workers in these kind of jobs.

Problems of Trades Unions.

1. Create Unemployment.

If labour markets are competitive, higher wages will cause unemployment. Trades unions can cause wages to go above equilibrium through the threat of strikes e.t.c. However when the wage is above the equilibrium it will cause a fall in employment.

2. Ignore non Members

Trades unions only consider the needs of its members, they often ignore the plight of those excluded from the labour markets, e.g. the unemployed.

3. Lost Productivity.

If unions go on strike and work unproductively (work to rule) it can lead to lost sales and output. Therefore their company may go out of business and be unable to employ workers at all.

4. Wage Inflation.

If unions become too powerful they can bargain for higher wages, above the rate of inflation. If this occurs it may contribute to general inflation. Powerful trades unions were a significant cause of the UK's inflation rate of 27% in 1979.

The benefits of trades unions depends on their circumstances. If they face a monopsony employer they can help counterbalance the employers market power. They can increase wages without causing unemployment.

If unions become too powerful and they force wages to be too high, then they may cause unemployment and inflation

It also depends on whether they cooperate with firm or not on increasing productivity.

see also:

Labels: labour markets, Mrs Thatcher, trades unions

When Mrs Thatcher came to power in 1979, the economy was generally considered to be facing severe structural problems including:

* Inflation of 27%
* Powerful Trades unions causing wage inflation and time lost to strikes.
* Unemployment increasing to a post war record of 700,000
* High levels of government debt that required politically sensitive borrowing from the IMF.

On coming to power in 1979, Mrs Thatcher lost no time in seeking to make a clean break with the past. Mrs Thatcher was heavily influenced by the idea of Monetarism and free market economics. In addition, she wished to “destroy” the power of the “Socialist / Communist” trades unions. On coming to power, the first policies of the Conservative administration were to tackle both inflation and the budget deficit.

The belief of Monetarism was that to control inflation you needed to control the money supply. To control the money supply, it was necessary to reduce any government deficit. Therefore, extreme deflationary policies were implemented. Firstly taxes were raised and government spending cut. Interest rates were also increased, as the government sought to reduce inflation. These deflationary fiscal and monetary policies did have the effect of reducing inflation; however it was at a cost of falling Aggregate Demand and lower economic growth. In the middle of 1980 the economy had been plunged into full scale recession, but the government still pursued its deflationary policies. As unemployment reached the unprecedented level of 3 million (1) There was widespread criticism of the government. During 1981, in a famous letter to the Times, 365 economists signed a letter calling on the government to alter its economic policy and put an end to the recession. (3)

With criticism mounting, even from her own party, Mrs Thatcher was under pressure to change course (a little like Edward Heath had in the early 1970s) However, in a now famous speech at the 1980 Conservative party conference, Mrs Thatcher stood up and defiantly said.

”You turn if you want to, but this lady is not for turning.”(2) It encapsulated her stubbornness and resolve. Fiscal policy and monetary policy remained tight, and unemployment remained close to 3 million until 1986.

The deflationary fiscal and monetary policy’s were exacerbated by 2 factors.

Firstly in the early 1980s sterling became an important petro currency; with the production of oil in the north sea. The £ rose rapidly. Combined with rising interest rates, sterling appreciated from £1 to $1.5 to $2.5. This appreciation in the pound adversely affected Britain’s exports and manufacturing sector. It was here, that the UK suffered the worst effects of the 1981 recession.

Secondly, controlling the money supply proved to be much more difficult than theory predicted. Despite rising interest rates and falling AD, growth in the money supply remained stubbornly high. This encouraged the government to maintain a tight fiscal and monetary policy. Inflation fell but the money supply didn’t; the link between money supply and inflation proved to be very tenuous, but by trying to reduce the money supply they reduced AD by more than was necessary.

On the one hand, inflation was reduced, but arguably it could have been done with much less pain. In seeking to meet spurious money supply targets they caused an unprecedented level of unemployment. This unemployment caused not only personal loss but widespread social problems. The mass unemployment, associated with inner cities, was very closely responsible for the riots which sparked across Britain in 1981.

Public anger at the Conservative economic record was to a large extent mollified by the patriotic success of the Falklands War. Riding on the back of a successful military victory, and a Labour party hopelessly divided, Mrs Thatcher was returned to power in 1983; ready for her next challenge - to take on the miners.

References

(1) Highest since Great Depression

(2) BBC 1980 - Mrs Thatcher
(3) Economist letter to Times