Since the 1980s, trade union membership as a share of the total workforce has, on average, decreased by 25 per cent. In the same period, wage bargaining has become more decentralised, taking place more often at company level (rather than at sector or industry level), according to statistics provided by the OECD, reflecting a major decline in union bargaining power. Alongside the significant documentation of these changes, a large literature has investigated the potential causes of this decline in bargaining power – trade globalisation, technological change, changes in labour market institutions, more frequent anti-union strategies by employers as well as firms’ increasing market power.
An important but largely overlooked factor that has significantly contributed to the decline in union bargaining power is the rising power of institutional investors. These are financial actors whose role is to store and manage collective savings by combining different levels of risk, return or maturity (short- or long-term), mainly investment funds, insurance companies and pension funds. Their influence in the finance industry has sharply increased, as reflected by a growth in the share of assets they hold. For instance, total assets held by any type of institutional investor increased from 30 per cent of GDP in 1980 to 156 per cent in 2017, a five-fold increase over the period. Because institutional investors have by definition concentrated stock ownership, they have a large influence on the decision-making process at company level, with strong implications for corporate strategies and governance. This contrasts with minority (or individual) investors who, because of the dispersion of capital structure ownership, have little influence over corporate governance. A shift in the structure of stock ownership has been observed in all OECD countries, with institutional ownership rising at the expense of direct ownership by households.
The deregulation of financial services in the 1980s played a central role in this shift, as new financial intermediaries emerged to accumulate large pools of private capital. Potential economic and political consequences emerge, thereby affecting unions’ bargaining capacity through an erosion of their power (reflecting a declining membership and/or coverage). First, the rise of institutional investors may have a strong adverse effect on jobs and wages, as shown by different qualitative contributions, mainly in the case of the United States. Institutional investors are more likely to require a higher rate of return on their assets, on account of their higher degree of risk aversion and asset concentration.
Institutional investors have even demanded increasingly higher returns over time, especially in an environment of gradually falling interest rates. To deal with this, new strategies – as well as new financial products (such as private equity) – have been adopted to increase the return on their holdings. For instance, in the Netherlands and the United States, the dominant investment category for many pension funds shifted from government and corporate bonds (as ‘safe’ assets) to corporate equity during the 1980s/1990s, offering higher returns of investment as ‘riskier’ assets. This was also the case for public pension funds, such as CalPERS in the United States, which decided in the 1980s to invest its portfolio of assets in equity holdings with active shareholders. Therefore, deep job cuts may occur in firms with lower financial values, which do not guarantee this rate of return.
More broadly, institutional investors are more likely to promote higher labour market flexibility, in terms of compensation or job security. Massive job losses can have a direct effect on unions’ ability to preserve the interests of their members. Second, the rise of such investors may also contribute to a weakening of the political influence of unions. The increasing economic influence of institutional investors may result in increasing political power to shift the policy space and reduce the political influence of unions. These mechanisms contribute to an erosion of union power and can have a direct impact on the individualisation/decentralisation of wage bargaining. Institutional investors prefer firms with adaptable wages tied to performance, promoting individualised compensation like Employee Stock Ownership Plans (ESOPs). Variable pay adoption aligns shareholder and employee interests, likely leading to decentralised bargaining and thereby challenging centralised union control.
Indeed, in recent work we document that the share of assets held by institutional investors is noticeably higher in countries with a widespread market economy and anti-union ideology. Constructing a synthetic index union bargaining power that captures the union density rate, the level of coordination of wage-setting and the adjusted coverage rate of collective bargaining agreements, we find a continuous decrease since the early 1980s. Both insurance companies and pension funds have played a particularly active role in the decline in union bargaining power. Insurance companies have become more active financial intermediaries by offering direct insurance (or reinsurance) services and providing protection from possible events in the future, and especially for life insurance. Pension funds have also become central financial intermediaries by offering retirement income.
More importantly, even though these two categories of institutional investors are generally seen as long-term investors, their ties to short-term investors, like private equity, have become stronger encouraging them to become increasingly short-termist. Therefore, the rising power of these two types of institutional investors puts pressure on corporate governance to actively pursue higher rates of return. This very often includes undermining the role of trade unions and, consequently, their bargaining power. Interestingly, pension funds had a more pronounced impact on union bargaining power in the 1980s and the 1990s, when assets managed by pension funds grew the most. However, in countries like Germany, Austria and Finland, where codetermination laws exist, trade unions often manage to maintain higher bargaining power, at least at the company level. Also, interestingly, in coordinated labour markets like Germany’s, employment protection to some extent mitigates the negative impact of institutional investors on union power, leading to lower rates of job destruction and wage reduction. In less regulated labour markets, institutional investors have a stronger impact on diminishing union bargaining power, especially evident in periods of labour restructuring and in instances of takeovers.
The erosion of union bargaining power under the influence of different structural factors, including the rise of institutional investors, raises the issue of public policies being implemented by the state. Government policies – through, for instance, various social policies – could be enacted to compensate for the adverse effects of the rise of institutional investors on wages, labour-management relations and working conditions.
Thibault Darcillon is an Associate Professor of Economics at the University of Paris VIII Vincennes Saint-Denis. His research interests are in financial macroeconomics and labour economics adopting a political economy approach, with a focus on finance and inequality in the OECD countries.
Yasmine Mohamed is a Professor of Industrial Relations at the University of Quebec in Abitibi-Témiscamingue (UQAT). Her research focuses on the impact of financial practices on job quality and union bargaining power in the private sector and on industrial relations and labour relations in the (semi-)public sector.
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