The class struggle in one picture

Social Democratic economic theory is that unions and collective bargaining can dramatically improve the earnings of the working class relative to owners of capital.

Neoclassical economic theory in contrast predicts that unions are not needed. Competition among firms for workers ensures that labor get’s its marginal product. Social Democrats believe this is naive.

There is simple and powerful evidence that the Social Democratic theory is wrong and the neoclassical theory is correct.

I have plotted the share of workers that are covered by collective bargaining agreements. This is better than the share of workers that are members of unions. In some countries, such as France, few workers are actually members of unions, but unions have the power to determine contracts for workers that are not members. There are huge differences across countries. In Sweden and France 90% of workers are covered by collective union agreements. In the U.S and Japan only 15% of workers have their wages determined by unions.

I also plot the share of national factor costs that goes to labor (as wages and compensations). What you will notice is that this does not vary systematic across countries.

The way the economy gets divided between capitalists and workers is virtually identical in weak union countries such as the U.S as it is in countries with powerful unions, such as France and Sweden.

If anything, American workers with weak unions get a bigger share of the cake compared to European workers with strong unions. Due to high labor costs, European workers have to some extent been replaced by machines.

Italian workers get slightly less than other countries. The reason I believe is that they have a high share of self-employed, which does not fit nice in the capital-labor divide.

So are unions useless? Not entirely. Unions can raise the wage of some workers, but not at the expense of capital, but at the expense of consumers (mainly other workers), or perhaps single “rent” earning industries (such as mining or years ago American auto). This is good and well for those few workers, but does not work as a large scale redistribution program, since workers are just transferring resources from other workers.

Second, Unions seem to be better able to extract rent within the class of workers, from high skilled to low skilled workers, than they can do with capital, which is very responsive to returns. If capital earnings go down, investments in capital goes down, or is perhaps re-located to other countries. In contrast I.Q. and education seem less elastic in supply, so they can be taxed more by unions.

This simple graph can tell us a lot about the economy, and is a powerful argument against the world-view of the left.

The Spirit Level dishonest about the state of research

The Journal of Economic Literature is the most prestigious journal for summarizing the findings of a field of research. Princeton Economist Agnus Deaton surveyed the literature on inequality and health. Deaton is not just anyone, there is talk about eventually awarding him the Nobel prize.

Deaton starts his conclusions by writing:

“The stories about income inequality affecting health are stronger than the evidence”

He further concludes:

But who are you going to trust, one of the world’s leading Health Economists in the Journal of Economic Literature, or Wilkinson and Pickets own(!) meta-study, and their claims on their book selling tour?

The Spirit Level makes a big deal about the association between inequality and health within American States. But in another paper Deaton and Lubotsky have shown that:

(from abstract) “Conditional on the fraction black, neither city nor state mortality rates are correlated with income inequality”

Here is the share of minorities in 2000 and Gini in 1999.

I did the regression to make sure: Controlling for the share of African Americans Gini has no statistically significant effect on life expectancy within American States (p value 0.431).

The Spirit Level authors are not only wrong, they are dishonest. They must be aware that their correlation within states has been proven to be due to demographic factors. They must be aware that the more heavy-weight surveys of the literature conclude that there is no robust relationship between inequality and life expectancy.

But they know that they audience does not know this, and exploit the trust of the readers to sell them a false view of the state of the science.

Scientific Nobel Prizes per capita among the OECD

Relying on Wikipedia (I believe it is reliable for this purpose, since it in turn uses the Nobel web page), I have calculated the number of scientific Nobel prizes per capita in the post war period. Because the period is 1945-2009 I have used the average population 1950-2009 from the OECD Factbook. Note that Wikipedia double counts people with affiliation to more than one country.

To make it about what everyone agrees are pure sciences, the Nobel Memorial Prize in Economic Sciences is not included. The figures are thus based on only Physics, Chemistry and Medicine.

Not surprisingly The U.S crushes the E.U.15, getting 9.8 per ten million people, compared to 4.7 for the E.U.15. The U.S alone got close to half of all scientific Nobel prizes in the post-war period, more if Economics is included. (I once did the same exercise for U.S alone, including Economics, restricting the country affiliation to what the Nobel home page wrote, and measured those with 2 affiliations as half. The U.S got 60% of all prizes).

It may be just a coincidence, but a good news for Europeans is that the E.U.15 reduced the massive gap with the U.S slightly in the 2000s compared to the 1990s. Not adjusting for population the U.S got 117% more prizes in the 1990s, and “just” 84% more in the 2000s.

What I am really impressed by is Switzerland, who has by far most prizes per capita in the world in the post war period. There is a famous quote from the movie The Third Man that “In Switzerland they had brotherly love – they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”

This is wrong, and an example of the representativeness bias. (Already by the time the movie was made, tiny Switzerland had won 8 scientific Nobel prizes).

Sweden does very well also. Someone could blame this on home bias. The Literature prize for example has an absurd number of Swedish and Nordic winners. Sweden has 6 Literature Nobel winners and the Nordic countries in total have 14! In comparison China has 1 literature prize, the United States 12. For Economics Ohlin deserved it, Myrdal probably did not. I don’t have the knowledge to judge the 3 core sciences, but hopefully they are more objective. I personally think even without home bias Sweden would do very well, they are a creative people with a strong tradition in engineering and science, especially before the welfare state started to erode some of their norms and education standards.

The Swiss case aside stereotypes are confirmed. Germany is a science powerhouse, Italy is not, to put it kindly, and France is in between.

Japan and South Korea do poorly, in line with the stereotypes that Asians are smart but not creative. However a more likely explanation is the very long lag between scientific work achievement and prize, in much of the studied period Japan and South Korea were quite underdeveloped.