Living wage, class conflict and ethnic strife

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Living wage, class conflict and ethnic strife

     ‘Living’ wage, class conflict and ethnic strife

    ;Indraneel Dasgupta

School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, UK

    Phone: 44-115-9514297 Fax: 44-115-9514159 E-Mail:

    Version: 2 August 2008


    We examine how group-specific differences in reservation wage, arising due to asymmetries in social entitlements, impact on distribution via the joint determination of class conflict between workers and employers, and „ethnic‟ conflict among workers. We model a two-dimensional

    contest, where two unions, representing different sections of workers, jointly but non-cooperatively invest resources against employers in enforcing an exogenously given rent, while also contesting one another. The rent arises from a „living‟ wage, set above reservation wage rates via labour regulations. We show that high reservation wage workers gain, and employers lose, from better social entitlements for low reservation wage workers. The latter

    however benefit, with employers and against the former, from weak labour regulations. When

    minority/immigrant workers are marginalized both in the labour market and in non-wage entitlements, improving job access and expanding „social support‟ has contradictory effects on class and ethnic conflicts. „Trade unionism‟, i.e. political articulation of shared economic interests alone, appears insufficient to temper ethnic conflicts among workers.

    Keywords and Phrases: Class conflict, Ethnic conflict, Living wage, Labour regulation, Social entitlement, Affirmative action, Distribution.

JEL Classification Numbers: D31, D72, D74, I38, J52, O17.

; I thank Ravi Kanbur for numerous conversations over the years on issues related to this paper.

1. Introduction

    Conflict between workers across ethnic or religious divides is typically perceived as reducing their 1collective strength as a class in the common distributive conflict against employers. The key

    strategic question frequently facing political formations on the Left is thus how class unity among workers may be achieved in practice. At the same time, greater mobilization of workers in their common economic conflict against employers is also often considered an effective barricade against ethnic conflict within the working class. The idea appears to be that the very provision of a political platform for articulating common economic interests of workers would serve to reduce conflicts

    within the working class along identity fault-lines, by revealing to them the ultimately self-defeating 2consequences of such „fratricidal‟ warfare. Yet, in practice, attacks on one section of workers by

    another are often sought to be legitimized by the argument that the former are objectively advancing the interests of employers against those of the working class as a whole. Thus, for example, during the anti-immigrant riots in South Africa in May 2008, Black South Africans involved in the violence

    were reported as accusing foreigners of undoing years of fighting against white rule and undermining 3the minimum wage. Differences in reservation wage rates between native and immigrant workers

    impacted on both class conflict between workers and employers and ethnic conflict among workers: these two dimensions of distributive conflict in turn conditioned one another.

     Individuals often acquire a quantum of resources purely by virtue of their membership of some collectivity. Identity divisions among workers, in conditions where they acquire political salience, also often largely overlap with historically generated differences in such „social‟ (i.e., non-market)

    entitlements. Social entitlements in turn determine the terms under which an individual is willing to sell her labour power in the industrial economy, i.e. her reservation wage. Workers from communities with lower social entitlements typically have a lower reservation wage. The primary objective of working class organizations in the economic conflict against employers is to ensure a greater surplus for workers, i.e., a higher premium over the reservation wage. Yet, the same wage rate

     1 Lenin‟s 1905 address to Jewish workers in Russia provides a clear, and oft-cited, articulation: “(T)he

    Jewish workers, as a disenfranchised nationality, not only suffer general economic and political oppression, but they also suffer under the yoke which deprives them of the elementary civil rights. The heavier this yoke, the greater the need for the closest possible unity among the proletarians of the different nationalities; for without such unity a victorious struggle against the general oppression is impossible” (Lenin, 1986: p. 42). 2 For example, Barack Obama attempted to trump racial divisions with a call to working class unity during his 2008 US Presidential campaign: “(T)his time we want to talk about the fact that the real problem is not that

    someone who doesn't look like you might take your job; it's that the corporation you work for will ship it overseas for nothing more than a profit” (Speech in Philadelphia; The Guardian, London, 18 March 2008). 3 “Other locals expressed anger, arguing that Africans from neighbouring countries were prepared to work for only $4 a day when they insist on a minimum wage of at least $12. They were also angry with white South Africans who employ foreigners for what they say is next to nothing. Responding to the charge that black South Africans are lazy and unwilling to work as hard as their poorer neighbours and were chasing away the competition, the group asked why they should have to toil for so little or be poor in a country rich with diamonds and gold (“S

    Africa violence reaches Cape Town”: Al Jazeera English, 23 May 2008,


    implies differential premiums for workers across identity divides, when such divides overlap, due to historical reasons, with present differences in reservation wage.

    The purpose of this paper is therefore to examine how ethnicity or religion-specific differences in reservation wage, interpreted as the consequence of historically generated asymmetries in social entitlements, impact on distribution via the joint determination of class conflict between the working class and the employing class, and „ethnic‟ conflict (i.e., distributive conflict along such identity divides) within the working class. Does prior inequality in social entitlements within the working class end up harming even its privileged section? Would higher returns from engaging in class conflict reduce ethnic conflict or benefit all workers? Can „trade-union politics‟, i.e. articulation

    of shared economic interests in contesting the employing class, suffice as an incentive for rational 4workers to abjure intra-class warfare? These are the questions we address.

    The connection between identity divides and asymmetries in social entitlements (and thus

    reservation wage) among different segments of workers that we highlight arises in many different ththcontexts. Jewish workers in Europe in the 19 and early 20 centuries, Arab workers in Israel, Black

    workers in apartheid South Africa, Black workers in Jim Crow US, lower-caste workers in India, all provide obvious examples of segments systematically denied access to residential neighbourhoods

    and valuable public facilities, including security, that are available to other segments of the working 5class. In many developing societies, customary rights to rural common property resources such as

    forests, rivers, ponds, grazing land, and sometimes even small plots for subsistence agriculture, are contingent on being born into specific ethnic or religious groups. In most countries, large sections of immigrant workers face legal restrictions on accessing health, welfare and educational facilities, relative to the native-born. Furthermore, ethnic and religious communities often develop their own support institutions which largely, or even entirely, exclude other communities. Thus, workers from communities with weaker internal support institutions find themselves with lower social entitlements. There is a second sense in which differences in community origin may generate differences in social entitlements. Modern large-scale production develops by absorbing, as workers, individuals

    from traditional forms of employment in subsistence agriculture, artisanal production, petty trade and 6services. Different ethnic or religious groups have often specialized in specific niche occupations in

    pre-modern societies. Entry into these occupations was regulated by a mix of custom, traditional law and competitive advantage due to inter-generational transmission of information and training

     4 Roemer et al. (2007) have shown how ethnic divisions may lead to electoral equilibria which restrain redistribution. We focus instead on non-electoral conflict equilibria. Thus, our contribution is rooted in the

    literature on conflict and rent-seeking contests (see Garfinkel and Skaperdas, 2007, for a survey). In this literature, Katz and Tokatlidu (1996) and Glazer (2002) analyse aspects of internal vs. external rent seeking. While sharing a structural analogy, our specific focus is different. Dasgupta and Kanbur (2007, 2005a) examine the mediation of ethnic and class conflicts through voluntary contribution to public goods that are valued independently of income consequences. We complement their analysis by abstracting from such public goods. 5 See Dasgupta and Kanbur (2005b) for an expanded discussion of how community origin may influence access to public goods. 6 As in the classical two-sector model of economic development due to Lewis (1954).


    exclusively within the community. Thus, in developing societies today, it is not unusual to find different traditional occupations generating different earnings, yet being largely dominated by particular identity groups. The modern industrial economy expands in these societies by drawing in,

    as similarly paid workers, individuals whose earning opportunities in the residual, traditional/informal 7sector can vary greatly depending on their ethnic location.

    While conflict between workers and employers has various dimensions, we focus on such conflict over the scope and implementation of a given, legislatively sanctioned „social/living wage‟. While the notion of „social entitlement‟ involves the rights of individuals to a quantum of resources

    purely by virtue of their membership of some community, that of a „social‟ wage involves a collective recognition of an individual‟s right to a quantum of resources merely on account of her willingness to alienate her labour power. Minimum wage laws constitute the obvious example of social regulation of the employment relationship. But the notion of a social wage also includes regulation of other aspects such as workers‟ health and safety, hours of work, leave and childcare facilities, minimum age of

    employment etc. Together, such labour regulations aim to put a composite floor on an individual‟s return from selling her labour power, above what an uncontrolled labour market might typically provide. This composite floor, the social wage, thus generates a rent, which is contested over by workers and employers. While unions seek to enforce and expand the scope of the social wage, employers attempt to restrict or evade it, whether illegally or by utilizing loopholes and ambiguities in legislation. Much of the day-to-day conflict between employers and unions takes the form of such contestation. It is this aspect of the class conflict, and its relation to ethnic conflicts among workers over sharing of the associated rent accruing to the working class as a whole, which we analyze.

    We model a two-dimensional contest, where two agents (unions), representing different sections of workers, jointly but non-cooperatively invest resources against employers in acquiring a share of an exogenously given rent, or surplus. This surplus arises from an exogenously determined social wage, set above workers‟ reservation wage rates. Employers seek to evade the social wage and pay workers their reservation wage, whereas the unions attempt to defend (i.e. enforce) it. The two sections of workers, interpreted as two different identity groups, differ in terms of their reservation wage. The two unions also invest resources in a simultaneous contest against one another that determines how the surplus accruing to the working class is divided between its constituent sections. An agent representing employers chooses their resource expenditure on evading the social wage, taking into account the equilibrium defensive responses of the two unions. Thus, ethnic conflict within the working class and class conflict between workers and employers jointly determine the distribution of the surplus among employers and the two constituent sections of the working class.

     7 In India, for example, caste and religious groups typically continue to dominate in their respective traditional occupations, generating systematic differences in earnings across communities. See, for example, Harris-White (2003). Ethnic niches are not absent even in the modern sector, and capitalists may find it rational to wage discriminate among workers belonging to different ethnic groups (e.g. Roemer, 1979). Our interest however lies in analyzing ethnic conflicts among workers even when they are treated identically by capitalists.


    We first show that the union representing „advanced‟ workers, i.e., workers with high reservation wage, may concentrate exclusively on ethnic contestation against other workers, choosing to leave class contestation entirely to the union representing „backward‟ workers, i.e. workers with low

    reservation wage. The latter participates in both ethnic and class warfare. We then show that a rise in the reservation wage of backward workers also benefits advanced workers, while hurting employers. Such a rise reduces the incentive for the backward section to invest in either class or ethnic conflict, thereby increasing both employer evasion and the share of the advanced section. For advanced workers, the second (ethnic) effect necessarily dominates the first (class) effect, so that this section benefits overall. For employers, lower gain from successful evasion outweighs the benefits from greater evasion, so that their income falls overall. A rise in the social wage, while aggravating both class and ethnic conflicts, benefits only the advanced section of the working class, making the backward section and employers both worse off. These comparative static conclusions regarding conflict and distribution hold even when backward workers do not compete with advanced workers in large sectors of the labour market, say due to discrimination, legal restrictions, or small numbers.

    Our exploration suggests that advanced workers may, indirectly, benefit from improved social entitlements for backward workers. Thus, we provide micro-foundations for an argument of class solidarity between advanced and backward workers, grounded in an „enlightened‟ (i.e. general

    equilibrium) conception of self interest. However, our analysis also suggests that such an argument may be difficult to extend beyond the sphere of social entitlements to that of „labour rights‟. Specifically, our results suggest that working class (say minority or immigrant) communities with weak entitlements may share an interest, with employers and against workers from privileged communities, in

    keeping labour regulations (and thus the social wage) relatively low. Affirmative action programs that seek to open up larger sections of the labour market to workers from marginalized ethnic, racial or religious communities may pit such groups against workers from the dominant community, benefiting employers. Thus, when ethnic minority or immigrant workers are initially marginalized both in the labour market and in access to non-wage entitlements, improving job access (say, through positive discriminatory job quotas) and expanding „social enfranchisement‟ (say, through improved housing, health, child-support and unemployment benefits) for such workers may have contradictory effects on class and ethnic conflicts. Lastly, our analysis suggests that the politics of „trade unionism‟, i.e. articulation of shared objective economic interests alone, may prove insufficient to control ethnic conflicts within the working class. A working class politics that also ventures into the provisioning of class-cultural public goods, i.e. of non-economic forms of shared identity articulation specific to the working class as a whole, may have better prospects. Section 2 develops the model. The main results regarding conflict and distribution are presented in Section 3. Section 4 discusses their extension to contexts where backward workers are prevented from competing in parts of the labour market. Section 5 summarizes and concludes.


2. The model

    Consider a society with two classes: employers (R) and workers (K). R controls access to a productive asset, say land or capital. This productive asset, when combined with one unit of labour, yields a 8revenue W. K is endowed with two units of labour power, but R does not own any labour

    power. Hence, R needs to employ half of K‟s labour power to generate the (gross) revenue W; it

    retains the surplus left after wage payments. K is equally divided into „advanced‟ (M) and „backward‟

    (B) sections, distinguished by different reservation wage rates, respectively, w and w; MB

    We interpret these two sections as different identity (ethnic or religious) 0. ~(( wwW BM

    groups. Workers can be hired at some „social‟ (exogenously mandated, and thus non-market clearing)

    wage rate ;, social wage rate is however „contested‟, in that employers attempt to WwW. This

    , M

    attack (evade) it by hiring only B workers and paying them w, whereas workers seek to defend B

    (enforce) the social wage. The extent of implementation of the social wage is thus determined as the outcome of class conflict between workers and employers.

     To fix ideas, we think of the social wage as a legislatively mandated „minimum‟ or „living‟ wage, along with a package of mandated workers‟ benefits or „protection‟ (e.g. pensions, severance payments, workplace voice and control, health and safety regulations, leave and childcare facilities, limitations on hours, intensity and forms of work, seniority and overtime rules, minimum age of employment, etc.). Typically, in practice, the social wage comes about as the legislative outcome of a

    complex and evolving process of society-wide political conflict and negotiation among representatives 9of workers, capitalists and others, including, historically, the landed gentry. These

    conflicts and negotiations may also have trans-national dimensions, in that international agreements 10often impose social wage conditions on participating countries. Once determined, the social wage

    generates a rent, which is contested over by workers and employers. It is this subsequent contestation that we wish to conceptually isolate and analyze. Such contestation can take both legal and extra-legal forms. Laws leave loopholes, grey areas and interpretative ambiguities that are fought over in

    courts by representatives of employers and unions. Employers may also resort to illegal violation of 11labour regulations. Contestation can involve litigation, lobbying, bribing of judges, regulators and

    politicians, strike making and strike breaking activities (including the strategic use of violence), etc.


     The assumption of inelastic labour demand can be relaxed without adding any substantive insight. 9th Conservative foundations for the welfare state were laid down in the 19 century by Disraeli in Britain

    and Bismarck in Germany. Support or opposition from groups representing the peasantry, urban intellectuals, and the intermediate strata consisting mainly of petty traders, artisans and shopkeepers played a key role in the thlegislative evolution of labour regulations in most countries in the 20

     century. 10 The European Union imposes a set of labour regulations on all member countries. International trade, aid and investment agreements often include clauses regarding „fair‟ labour standards/practices. 11 For example, Indian firms with fewer than ten workers are not subject to labour regulations, while most large firms maintain a substantial casual labour force that is undeclared and thus free from regulation. The government is currently proposing to restrict the scope of labour regulations further, to firms employing more than forty workers. Violation of labour regulations is routine in developing countries. See Dasgupta and Marjit


     In the context of developing countries, one can site the social wage in the so-called formal (or modern, large-scale industrial) sector. Unions are, by and large, confined to this sector; minimum wage laws and other labour regulations also usually pertain only to this sector.

     Each section of K is represented by its own union. The two unions, M and B, non-

    cooperatively spend resources, respectively ,, to defend the social wage. Employers‟ spending

    hh BM

    on attacks on the social wage is h. We identify the extent of class conflict with overall expenditure R

    on contestation over the social wage: h,,. If class conflict occurs (h(0), the hhh MRB

    proportion of workers hired who receive W(working class success in the class conflict) is given by


    hh BM

    the Tullock (1967, 1980) contest success function . The proportion of workers hired who


     h1 R

    receive w is thus . In the absence of class conflict (h0), this proportion is . B

    h2 There are different ways of interpreting our formulation of working class representation. One

    can visualize this in terms of separate and op enly competing organizations divided along ethnic,

    religious or linguistic lines. One can also interpret it in terms of internally cohesive identity factions or 12even organizationally recognized sub-sections within a nominally united workers‟ organization.

    The key idea that we seek to capture is that coordination costs of engaging in collective action are significantly lower within an identity group than across identity groups inside the working class. Class

    conflict involves attempts to ensure that all workers employed receive the social wage. Such

    attempts leave open the issue of how the consequent high (social) wage jobs will be rationed. This 13involves a second, „ethnic‟ dimension to distributive conflict, which we now formally model.

    Each union seeks to ensure a greater share of available high (social) wage jobs for its own

    section of the working class. Expenditures on such „ethnic‟ contestation are denoted by g, g. MB

    We identify the extent of ethnic conflict with overall expenditure on contestation over the social wage

    (2006) for a discussion and a model of class conflict in such a setting. A recent British Trades Union Congress thReport on Vulnerable Employment claims that more than two million people in Britain endure 19 century

    workplace practices, including payments below the minimum wage, absence of paid holiday or sickness leave, exceptionally long hours, and no compensation for workplace injuries. The report argues much exploitative treatment occurs because of legal loopholes that employers utilize (Trades Union Congress, 2008). The Report itself provides an example of expenditure by trade unions to contest and restrict such loopholes. Ehrenreich (2001) documents similar practices in the US, where union-busting constitutes a multi-billion dollar industry. 12 In India, for example, central trade unions affiliated to the national political parties contain caste, religion or region-specific internal lobbies; a multitude of independent trade unions also exist which explicitly seek to represent workers from particular communities. Ethnic sub-sections formed the organizational building blocks ththof the trade union movement in the Austro-Hungarian empire, as well as late 19 century US.

     - early 20 13 The de-linkage between contribution to class contestation and consequent gains typically arises due to

    indivisibilities in coverage and consequent non-excludability. Class contestation thus acquires a public good aspect: unions cannot prevent free-riding. For example, gains due to a strike cannot be restricted to participating workers, while enforcement of labour regulations cannot be confined to union members. Consequently, unions separately seek to ensure that their members constitute a larger proportion of the workers under coverage: such attempts bring about inter-union conflict. While the literature has widely noted the collective action problem in the context of individual unions, our intuitive entry-point is its exacerbation across ethnic/religious boundaries.


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