In the ongoing debate about how to stimulate economic growth in the UK, one often overlooked solution is to empower British unions. Contrary to the prevailing narrative that unions stifle economic progress, evidence suggests that stronger unions could actually drive investment and foster a more robust economy.
Historically, the role of unions in the UK has been significant. During the 1970s, when unions wielded considerable power, private non-financial corporations paid out 20p in dividend payments for every £1 of gross fixed-capital formation. This balance ensured that a substantial portion of profits was reinvested into the business, promoting growth and stability. However, in recent decades, this dynamic has shifted dramatically. By the second half of the 2010s, the figure had risen to 95p, indicating that nearly all profits were being funneled to shareholders rather than reinvested in the business.
The general secretary of the Unite union, Sharon Graham, has highlighted the issue of profiteering, which has persisted since the onset of the Covid-19 pandemic. A study of nearly 17,000 companies revealed an average increase of 30% in pre-tax profit margins in 2022 compared to the years before the pandemic. Despite this surge in profits, the UK's inflation rate peaked at over 11% in 2022, and many companies capitalized on this by raising their prices. This practice has not only exacerbated economic inequality but also stifled potential investment in new capital and employee compensation.
The rationale for limiting union power and bolstering corporate power was that it would stimulate growth by fostering entrepreneurship. However, the reality has been quite different. Dividends to shareholders increased two and a half times faster than total employee compensation between 1988 and 2019, while business investment remained consistently below the average for leading industrial nations. This trend suggests that the current economic model prioritizes short-term gains for shareholders over long-term investment in the economy.
Empowering unions could reverse this trend. By advocating for fair wages and better working conditions, unions can ensure that a larger share of corporate profits is reinvested into the business. This reinvestment can take the form of capital spending on new technologies, infrastructure, and employee training, all of which are essential for sustainable economic growth. Moreover, stronger unions can help address economic inequality by ensuring that employees receive a fair share of the profits they help generate.
The UK's corporate sector should provide a satisfactory explanation for the current distribution of profits. According to a paper by the left-leaning think tank Common Wealth, the majority of profits are being distributed to shareholders through dividends rather than being reinvested in new capital spending. This practice not only undermines the potential for economic growth but also perpetuates economic inequality.
Empowering British unions could be a key strategy to boost investment in the UK economy. By shifting the focus from shareholder dividends to reinvestment in capital and employee compensation, unions can play a pivotal role in fostering sustainable economic growth. It is time to rethink the narrative around unions and recognize their potential to drive positive economic change.
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