December 28, 2008
Unions in the American Economy
Unions in the American Economy-Becker
Union members constitute a mere 7.5 percent of the private sector American labor force, only one third of its share 25 years ago. This is why the UAW is a dinosaur, a relic of times past when unions were much more important. The UAW 's membership has declined by more than one third since 1970, and its membership is still declining at a fast clip. GM had one quarter of a million UAW workers in 1994, but now has less than 75,000 workers who are members. It is rather easy to explain why in effect, the US has become a non-union private sector economy.
The rapid shift during the past several decades from manufacturing to services has been a significant contributor since the generally smaller service establishments have always been much less unionized than the larger manufacturing establishments, like steel mills and auto plants. Globalization has been crucially important in several dimensions. Increased competition from imports have undercut the higher prices charged by domestic competitors who are forced to pay large benefits to their unionized workers. In addition, if a union tries to raise worker benefits, and hence production costs, by a lot, companies often close these plants, and set up production in other countries where costs are lower. Government provision of unemployment benefits and rules about layoffs- including anti-discrimination legislation- and voluntary provision by non-union companies of health and retirement benefits, and codified rules about the treatment of employees in regards to hiring, layoffs, and discipline have greatly reduced the advantages of unions in providing such benefits.
Border and southern states discovered that they could be attractive to companies if they had more hostile environments to unions than other states. When companies like Toyota and Honda decided to set up auto factories in the US, they generally avoided states where unions were powerful, and instead mainly went to states where unions were not important. Now foreign companies produce more than one third of all cars made in the US. Much of the decline in UAW membership has been offset by the growth of non-union workers in plants owned by foreign companies. In addition, cars made abroad have been out -competing cars made domestically by GM, Ford, and Chrysler. As a result, cars made by foreign companies, whether in the US or elsewhere, now account for more than half the cars sold in this country.
These powerful forces aligned against unions imply that the UAW and other large manufacturing unions are essentially finished, perhaps unless they receive major financial and regulatory support from the federal government. This is why the AFL-CIO and Change to Win went all out to get Senator Obama elected president. Unions are said to have spent over $400 million during the presidential race, and had several hundred thousand volunteers make phone calls and house visits. They claim to have been pivotal in Obama's victories in closely contested states like Ohio and Pennsylvania. According to one poll, about 2/3 of the members of the AFL-CIO unions voted for Obama, and only 1/3 for McCain.
Unions strongly supported Obama not only because Democrats have traditionally been much more pro-union than Republicans, but also because Obama had been explicitly supportive of unions. He and Joe Biden as senators co-sponsored the so-called Employee Free Choice Act. This Act failed to muster enough votes in the present Congress, but unions have placed highest priority on its passing in the new Congress that has a much bigger Democratic majority. Such a bill would give workers the right to join a union as soon as a majority of those employed at an establishment signed cards saying they wanted a union. Under present rules, there must be an election by workers to determine whether they want a union, with votes of individual workers being secret rather than publicly expressed on cards.
Any substantial shift of federal and state governments toward pro-union regulations would harm the American economy and the position of the typical employee. As Posner indicates, unions want greater monopoly power so that they can raise the wages and other benefits of union members above their competitive levels. Unfortunately, the effects of this are to reduce earnings for non-union workers, shift production outside the US, or toward states with less pro-union laws, and shift production in unionized plants away from labor and toward capital. None of these changes are beneficial to the efficiency and performance of the American economy, especially in a global environment.
Although the union leadership believes the Employee Free Choice Act and related legislation could add several million members, the good news is that they are likely to be wrong. The forces I discussed earlier that contributed to the decline of unions in the US are very powerful, they will continue to operate, and they are extremely difficult to reverse. So while pro-union federal legislation might well slow down the decline of unions in the private sector of the economy, it is highly unlikely to greatly affect the downward trend.
Can the United Auto Workers Survive? Posner
One of the reasons for the insolvency of the Detroit automakers (General Motors, Chrysler--and Ford, which appears to be insolvent too, despite its denials) is that their workers are paid higher wages, and receive much more generous benefits paid for by their employer, than the workers employed at the automobile plants, mainly in the South, owned by Toyota, Honda, and other foreign manufacturers. The total wage and benefit bill for the Detroit automakers is about $55 per hour, compared to $45 for workers in the foreign-owned plants, and the difference is plausibly ascribed to the fact that the Detroit automakers are unionized and the "foreign transplants" not. (The comparison excludes retiree benefits, a very large cost of the Detroit companies, but not an hourly labor cost.) This difference may seem small, considering that labor is only about 10 percent of the cost of making a car, but many of the workers at the companies that supply parts to the automakers (and the parts represent about 60 percent of the total cost of manufacturing the vehicle) are also represented by the United Auto Workers. Anyway, since the foreign transplants have other competitive advantages over the Detroit automakers, the latter can hardly afford to have even slightly higher labor costs.
When the auto bailout bill was being debated in Congress in November (ultimately it was voted down), Senator Corker said that he would support the bill if it conditioned the bailout on the Detroit automakers' reducing their workers' wages and benefits (to which the union would have to agree) to the level at the foreign-owned plants, as well as conform work rules to the work rules in those plants. The significance of the work rules must not be underestimated. As is common in unionized firms, the United Auto Workers has successfully negotiated not only for wages and benefits for the workers they represent but also for rules governing what tasks the workers can and cannot perform, how many workers must be assigned to a particular task, the order in which workers are to be laid off (usually it is in reverse order of seniority, because older workers tend to be stronger supporters of unionization than younger ones because the latter have better alternative employment prospects and so don't worry as much about job security) in the event of a reduction in demand for the firm's products, methods of discipline, and so forth. These work rules, collectively "featherbedding," make it difficult for a firm to optimize its use of labor, and, like the higher wages and benefits that unions obtain, add to the firm's labor costs relative to those of its nonunion competitors. A December 16 blog by Rand Simberg, http://pajamasmedia.com/blog/detroits-downturn-its-the-productivity-stupid/, presents a shocking picture of how work rules impair productivity at automobile plants at which the workers are represented by the United Auto Workers.
The goal of unions is to redistribute wealth from the owners and managers of firms, and from workers willing to work for very low wages, to the unionized workers and the union's officers. Unions do this by organizing (or threatening) strikes that impose costs on employers. For employers are rationally willing to avoid those costs at a cost (provided it is smaller) of higher wages and benefits and restrictive work rules. Because the added cost to the employer of a unionized work force is a marginal cost (a cost that varies with the output of the firm), unionization results in reduced output by the unionized firm and, in consequence, benefits nonunionized competitors. Unless those competitors are too few or too small to be able to expand output at a cost no higher than the cost to the unionized firms, unionization will gradually drive the unionized firms out of business.
Unions, in other words, are worker cartels. Workers threaten to withhold their labor unless paid more than a competitive wage (including benefits and work rules), but unless their union is able to organize all the major competitors in a market, the cartel will be eroded by the entry of nonunionized firms, which by virtue of not being unionized will have lower labor costs. The parallel to producer cartels is exact--workers are producers.
We are seeing this process of erosion of labor monopolies at work in the automobile industry. The market share of the Detroit automakers has shrunk steadily relative to that of the foreign "transplants" and with it the number of unionized auto workers--they are fewer by a third or more than they were in 1970. If the Detroit automakers will be forced to liquidate unless they can bring their labor costs down to the level of the foreign transplants, the UAW will be out of business either because the Detroit automakers liquidate or because, as a result of union concessions, the workers will no longer be getting anything in exchange for the dues they pay the union.
I don't think there's much to be said on behalf of unions, at least under current economic conditions. The redistribution of wealth that they bring about is not only fragile, for the reason just suggested, but also capricious, as it is an accident whether conditions in a particular industry are favorable or unfavorable to unionization. By driving up employers' costs, unions cause prices to increase, which harms consumers, who are not on average any better off than unionized workers are. Unions push hard for minimum wage laws and for tariffs, both being devices for reducing competition from workers, here or abroad, willing to work for lower wages. Current union hostility to immigrant workers is of a piece with the unions' former hostility to blacks and women--which is to say, to workers willing to work for a wage below the union wage. And by raising labor costs, unions accelerate the substitution of capital for labor, further depressing the demand for labor and hence average wages. Union workers, in effect, exploit nonunion workers, as well as reducing the overall efficiency of the economy. The United Auto Workers has done its part to place the Detroit auto industry on the road to ruin.
There is also a long history of union corruption (though not in the UAW). And some union activity (though again not that of the UAW) is extortionate: the union and the employer tacitly agree that as long as the employer gives the workers a wage increase slightly above the union dues, the union will leave the employer alone.
There may be, I grant, cases in which unionization reduces an employer's labor costs. If there is deep mutual antipathy between workers and employers, perhaps breaking out in violence--with strikebreakers beating up strikers and strikers beating up scabs and sit-down strikers destroying company property--there may be benefits from interposing an organization independent of the employer between employer and workers, and from creating (as the National Labor Relations Act has done) a civilized mode of resolving labor disputes. But in cases in which union organization is mutually beneficial, the employer will invite the union to organize its workers. I am sure the Detroit automakers would very much like to disinvite the United Auto Workers.
Unions do provide some services that are valuable to employers, such as grievance procedures that check arbitrary actions by supervisory employees; and union-negotiated protection of senior workers can benefit their employer by encouraging them to share their know-how with new workers, without having to fear that by doing so they will be sharing themselves out of a job. But these are measures that an employer who thinks they will reduce his labor costs can take without the presence of a union.
Micky Kaus, another blogger who is an expert on the automobile industry, attributes much of the problem with the UAW to the procedures that govern labor relations in unionized plants. "The problem...is the American adversarial labor-management negotiating system, in which reasonable people doing what the system tells them they should do wind up producing undesirable results. Just as negotiating over work assignments means factories adjust too slowly to generate continuous efficiency improvements (which often involve constantly changing work assignments) negotiating ponderous 3 year contracts (in which Gettelfinger [the UAW's president] must extract every possible concession to please the members who elected him) means contracts adjust too slowly to save the companies from failure if market conditions change...[T[he $14 wage scale for new hires [to which the UAW agreed several years ago] hasn't had an impact because nobody new is being hired by the UAW's employers, who are shrinking, not growing. The obvious alternative to cutting the pay of nonexistent future workers would be to cut the pay of existing current workers--but they are the people the system tells Gettelfinger he needs to please." www.slate.com/blogs/blogs/kausfiles/ (Dec. 26, 2008).
The unions strongly supported the Democrats in the last election and are looking for payback. I do think that there are good economic reasons for keeping the Detroit automakers out of bankruptcy until the current depression hits bottom and a recovery begins--until then the shock to the economy would be too great (see my post of November 16)--and that will keep the UAW alive for a while. But if it resists making substantial concessions to the automakers, hoping that the President and Congress will force the automakers' bondholders to make the necessary concessions or that the taxpayer will be forced to subsidize the automakers indefinitely, the union will be playing a game of chicken that may end in its destruction rather than merely in its continued shrinkage as the industry shrinks. The auto bailout is deeply unpopular with the public and the UAW's stubbornness may reinforce the impression that unions are dinosaurs slouching toward extinction.