State of the Union

Amid widespread job losses and credit woes, it’s unsurprising that union membership is on the rise, jumping to 12.4 percent of the nation’s workforce last year. Yet while such organizations undoubtedly provide a valuable role in safeguarding employee rights and welfare, are they stifling America’s economic ambitions?

If the Detroit auto debacle has taught us anything, it is that labor unions can have a crippling impact on American companies’ ability to compete. So are unions still relevant in today’s hyper-competitive global business environment? Or is it time to re-evaluate their role? Business Management canvases the opinion of four experts to find out.

James Sherk
Bradley Fellow in Labor Policy at The Heritage Foundation

Unions don’t make money grow out of trees for their members. In order to raise their wages, what they do is form a labor cartel. It’s just like any other cartel or any other monopoly; they want to restrict the supply of their product (in this case, labor) so that there will be fewer jobs, which raises the wages.

But a cartel only works as long as there’s no competition. Think of OPEC, which does the same thing with oil. They try and restrict the supply of oil so that consumers have to pay more at the pump. But if you have all these non-OPEC nations producing oil the cartel breaks down; they can’t actually get a higher price for their product, and they’re stuck with the market rate. It’s the same thing for unions. If you’ve got competition, it breaks down the cartel and your members are forced to accept market rates rather than higher wages.

And that’s what’s been happening to the union movement. It’s not something the unions like to publicize, but actually in most newly organized companies once the workers vote for a union they don’t get any higher wages. Why is this? Well, the union doesn’t want to see the company go under; then they don’t have any more union members paying dues. And so they try not to negotiate contracts that put firms out of business. What that means, though, is that they can’t negotiate contracts that raise wages because as soon as the firm tries to pass on the wages to the consumers, consumers just say, “Oh, we’ll buy from this other company,” and the firm goes under.

That’s what’s happened to the Detroit automakers here in the United States. They were paying $70 an hour in wages and benefits, which is obviously a great compensation package if you can get it. But the Japanese automakers operating in the United States using non-union American workers – making between $40 and $50 an hour, still extremely good wages – have been able to undercut the Detroit manufacturers. And so that’s what competition does. Competition kills the ability of the union to force consumers to pay higher prices in order to fund their higher wages. 

I would argue that the place of a union is to keep management honest.  Workers should have the option of joining a union because, as the saying goes, “Management gets the union they deserve”. It’s good to have that threat out there, that the workers can form a union if the boss is being a jerk and not treating the workers with respect. But in terms of an economic role, there isn’t that much use for them.

If unions had fantastic training programs that made workers much more productive and that’s how they raised wages, then there wouldn’t be any economic harm. But the way unions attempt to raise wages is by forming a cartel, which we know from past experience is not good for the economy. So the way unions try and raise wages for their members is harmful to the overall economy, and ultimately it’s harmful for their own companies and causes them to become less competitive.

David Madland
Director of the American Worker Project at the Center for American Progress

I think the idea that unions aren’t relevant in a global economy is totally false – in fact, there’s even more need for them. Globalization has increased the power of management and capital, and so in order for workers to be able to bargain for their share of productivity gains, they need to be able to come together in unions and have some power to get their share of the gains.

Certainly, companies need to be competitive and need to succeed in order for workers to succeed, and I think most unions recognize that. I’m sure you can find instances where they do things that aren’t in the absolute best interest of the company, but the basic argument that workers around the world need to reduce their demands because they’re now competing against each other is deeply flawed. Those same kinds of arguments are made in support of abolishing the minimum wage. But really, paying workers a decent wage can be a competitive strategy, and there is evidence that when you pay your workers a higher wage you get greater productivity.

And while I’m sure unions did some things that contributed to the problems in Detroit, the major part of the problem was that the management made some really terrible decisions. They just weren’t making products that people wanted to buy at the prices they were trying to sell them.

In fact, there are plenty of companies that have good labor-management relations – Harley Davidson, AT&T, Kaiser Permanente are just a few great examples of how workers and management can work together effectively to be globally competitive. Unfortunately, far too many companies in the United States, especially in recent years, have been politically emboldened by right-wing ideology that’s promoted the idea that executives can do whatever they want, whenever they want, regardless of the costs on society. For the past eight years our labor laws were hardly enforced at all – minimum wage and overtime violations were rampant, because management had so much power and could take advantage of it.

At the core of our economic problems in the United States right now is that workers don’t have the purchasing power they need to drive the economy; in order to get workers greater income and benefits, labor unions have an essential role. When workers get together, they can bargain for better wages and benefits and get a greater share of the productivity gains. For the past 30-plus years, productivity has continued to increase quite rapidly. Workers are becoming ever more productive. They just haven’t gotten very much, if any, of that share.

So how do you enable a better relationship between the union and management? That’s a very good question. One of the problems in the United States is that there are many corporate executives who really don’t think unions have a right to exist, don’t think that their workers should be unionized and so continue to fight the union even after it has been recognized, and that certainly is detrimental to any relationship. So that’s the key: to recognize that both parties have a right to be there and exist and have something valuable to bring to the table. You need both sides to be working together to really succeed.

Stephen Cabot
Chairman of the Cabot Institute for Labor Relations

The labor union that represents the employees at a particular company negotiates a contract. And the contract includes what one can and cannot do as an employer, particularly with regards to protection of employee rights. And while the issue of protection is not necessarily a problem in itself, sometimes the protections protect the bad employees as opposed to the good ones. Those that are really performing don’t need a union and don’t need a union contract. It’s the slackers that do.

So for example, if you need to make layoffs, as you often do in a tight economy, the layoffs under the contract are made by seniority. If a union wasn’t around, a good management team would look at what work needed to get done and retain the best employees to do it. Under the union contract, it’s a case of the least senior gets laid off first. And then before you lay off, you can bump. There are many examples where unions restrict management’s ability to manage as effectively as it could.

We hear a lot about the need for businesses to be more agile and more flexible in order to compete, but unions are restricting that ability. The automotive industry is a case in point. If you take a look in the United States, some of the most successful companies –Toyota in Georgetown, Kentucky; Nissan in Smyrna, Tennessee; Honda in Marysville, Ohio – they’re non union. And these companies are able to make decisions that impact operations more effectively, more efficiently, more quickly. At GM and Chrysler, you see that their inability to be as flexible in virtually every way as the likes of Toyota is materially having a non competitive impact on their business.

The union movement really hasn’t changed much since the 1930s. We have legislation today that protects people. If they get laid off, they get unemployment compensation insurance. We have protections against discrimination because of age, sex, race or union activities. So many of the reasons for unions have gone out the window. The only place where unions have validity today is where an employer is stupid, insensitive, uncaring and unresponsive to the needs of employees. Then there’s a role for labor unions. That has not changed.

But what’s happened is that companies today better understand that employees are their most important resources. They are more enlightened in their management style in trying to build a positive culture. And so as a consequence, for companies who understand that – and most do – labor unions are irrelevant. It’s where employers are operating and managing in the dark ages, where they abuse employees, that unions might have some relevance. But that’s one in 100 companies today, or one in 1000 or one in a million. The companies I work with don’t operate that way.

If employees begin to see that the non union employer can be trusted and that there’s a positive company culture, the role of unions diminishes. In this instance, many employees decide that they no longer want a union, so when a union begins to see that positive cultural change, one of its strategies is to try to make things adversarial again and agitate.

The stronger that unions become and the more people who are in unionized environments, the greater the risk of an increase in the types of productivity issues that we addressed earlier. It will adversely affect our sustained positive recovery.

Ron Blackwell
Chief Economist of the American Federation of Labor and Congress of Industrial Unions (AFL-CIO)

Here in the United States, we have the most anti-union relationship between business and labor out of all the OECD countries. The United States actually has some of the most competitive companies in the world, but our national economy is not competitive as we’re borrowing five to six percent of our GDP to pay for the things that we consume that we no longer produce. I think restoring this country’s competitiveness is one of the fundamental challenges for establishing a more sustainable basis of growth going forward, and I think unions make an enormous contribution to that.

There’s a huge reservoir of information about the performance of companies that is locked up in the specific skills, knowledge and commitment of workers, but this is largely neglected in the way American companies are managed, because management tends to think that workers are ignorant or stupid or at least can’t be trusted, and therefore need to be supervised. And there’s no incentive in our industrial relations system for workers to offer that knowledge to management, since there’s no guarantee that it won’t be used against them.

What a union does is provide protection for the workers to share the knowledge that they have to help companies do things differently and do the things they do better, and that’s one of the keys to competitive success. One of the things that we’re going to have to do to make companies competitive in the United States is to base our competitive strategies on innovation – doing new things and doing the things we already do in newer and better ways. That means changing the way we work. The workers will resist those kinds of changes unless they know that their interests are protected in the enterprise, and that’s what unions provide.

It is very tempting for a company faced with falling markets to take the easiest route to try to regain competitiveness by cutting costs – and the largest part of those costs are compensation costs. And unions get in the way of taking that route because we believe it’s a very shortsighted route, particularly for a high-standard country like the United States. We are not going be able to compete by offering low wages; there’s no way American workers can compete with Mexican workers, much less Chinese workers, doing the same kind of thing.

Instead, our competitive success has to be based on innovation. Innovation is difficult, and management is right in the middle of that. How do we make new products, while increasing the quality of the products we offer and at the same time generating better customer service? How do we deliver products and services in ways that startle consumers and really build demand for those? That’s hard. Running a big business is a hard business, but running it as an innovative enterprise is an extremely challenging thing for management, and the temptation is always to take the low road to competitive success – to try to compete by cutting costs, including compensation costs.

Unions keep them from pursuing that kind of strategy and force them to compete with each other on a high-road competitive strategy. And when they take that strategy, their company’s gonna be more successful, the workers obviously are gonna have more job security, but the national economy is gonna prosper because they’re producing the kind of product and delivering the kind of services that enable us to be a world-leading economy.