The Role of Labor Unions in Fostering Economic Development

36 Pages Posted: 20 Apr 2016

See all articles by John H. Pencavel

John H. Pencavel

Stanford Institute for Economic Policy Research (SIEPR); IZA Institute of Labor Economics

Date Written: June 1995


In this essay on how labor unions work, the author proposes a framework for the law on collective bargaining in developing countries. The structure of developing economies cannot sustain as high a level of unionism as in industrial economies. Typically less (often much less) than a quarter of the workers in a developing country are covered by collective bargaining agreements-and those covered (the labor elite) are likely to be employed by the state and by large private sector employers. In this setting, the author says, states sometimes adopt either a patronage regime (nourishing unionism and collective bargaining) or an obstructionist regime (undermining and subverting it). Patronage regimes are found in Bangladesh, India, and certain African and West Indian countries (many of them former British colonies), countries in which close ties exist between political parties (sometimes including the governing party), and labor unions. Some of the features of obstructionist regimes are found in certain countries in Southeast Asia and North Africa. In both patronage and obstructionist regimes, unions are highly politicized. Because that state routinely figures in defining the union's effective environment, the union's relationship with state and political leaders becomes more important than its dealings with the employers of the workers they represent. Not only may agreements bear no relation to a firm's economic circumstances, but they increase dissonance between workers and union leaders. What is needed instead is a system of collective bargaining that directs unions' efforts to the ultimate lasting source of their members welfare: The firm they work for. Ultimately, improving workers' standard of living required growth in productivity, argues the author. Raising a worker's earning by redistributing income from profits, dividends, and interest cannot sustain a persistent rise in earnings. And mandating or encouraging high wage policies (as in Latin America and the Caribbean) discourages the economic growth that is the ultimate durable source of improvements in workers living standards. Unions can help raise productivity in the workplace by participating with management in the search for better ways of organizing production. It is important for workers not to feel alienated from the system and to believe they have a stake in it. They value the fact that they or their agents help to shape the working environment. In determining the "rules of the game" in which labor unions operate, societies have wrestled with the problem of finding the proper balance between upholding the principle of free association, on the one hand, and on granting entitlement that result in resource inefficiencies at best and ultimately in challenges to the authority of the democratic state at worst. Governments' main responsibility in labor relations is to set up the regulations that underpin labor market interactions, including the legal framework should neither encourage nor discourage unionism, says the author, but should keep the activities of unions in the domain where they can be productive: The enterprise.

Suggested Citation

Pencavel, John H., The Role of Labor Unions in Fostering Economic Development (June 1995). Available at SSRN:

John H. Pencavel (Contact Author)

Stanford Institute for Economic Policy Research (SIEPR) ( email )

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