There used to be more research and debate on the negative effects of labour resistance on economic development, but that topic has been crowded out by the intense focus on inequality of recent years. There now prevails a quiet presumption that labour movements have made only positive and large contributions to the historical rise in living standards.
So I illustrate the relevance of labour relations to economic development through the contrasting fortunes of India’s and Japan’s cotton textile industries in the interwar period, with some glimpses of Lancashire, the USA, interwar Shanghai, etc.
TL;DR version: At the beginning of the 20th century, the Indian and the Japanese textile industries had similar levels of wages and productivity, and both were exporting to global markets. But by the 1930s, Japan had surpassed the UK to become the world’s dominant exporter of textiles; while the Indian industry withdrew behind the tariff protection of the British Raj. Technology, human capital, and industrial policy were minor determinants of this divergence, or at least they mattered conditional on labour relations.
Indian textile mills were obstructed by militant workers who defended employment levels, resisted productivity-enhancing measures, and demanded high wages relative to effort. But Japanese mills suppressed strikes and busted unions; extracted from workers much greater effort for a given increase in wages; and imposed technical & organisational changes at will. The bargaining position of workers was much weaker in Japan than in India, because Japan had a true “surplus labour” economy with a large number of workers ‘released’ from agriculture into industry. But late colonial India was rather ‘Gerschenkronian’, where employers’ options were more limited by a relatively inelastic supply of labour.
The state also mattered. The British Raj did little to restrain on behalf of Indian capitalists the exercise of monopoly power by Indian workers. Britain had neither the incentive, nor the stomach, nor the legitimacy to do much about it. But a key element of the industrial policy of the pre-war Japanese state was repression of the labour movement.
Note: By “labour repression” I do not mean coercing workers, or suppressing wage levels, but actions which restrain the effects of worker combinations.
Nor am I saying unions are bad! I’ve written before that unions in Germany are great.
Also, I do not claim this post has any relevance for today’s developed countries. It’s mainly about labour-intensive manufacturing in historical industrialisation or in today’s developing countries.