On Unions

Unions are largely irrelevant -- now --  and there are good reasons for that. They have a chance to regain their clout, but they'll have to rethink their roles and tactics.

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My aunts belonged to the ILGWU back in the days when garment workers weren't allowed to use the bathroom before lunchtime. Unions helped bring us the 40-hour workweek, the weekend, and a host of other benefits that we now take for granted. Unions started at a time when capital held the power, both capitalistically and legislatively; there was plenty of labor available for the mostly unskilled jobs available, including millions of immigrants. Each unit of labor was expendable. And until 1933, when the NLRB was enacted, there was no legislative enforcement to speak of for the right to organize. 

Understandably, companies fought the unions and the history of those struggles is well-documented. Beginning in the late 1940s, however, the tone of the struggle changed: the fights were less about union rights and more about union wages and benefits. And by and large, those wages and benefits were generous. US manufacturing companies had the market to themselves (as late as 1965, the Big 3 owned 90% of domestic auto sales) and there was more to be lost from strikes than gained by bargaining down to the last penny. Too, much of the value of the benefits bargained for by the manufacturing unions were "future" benefits in the form of defined-benefit pension and medical plans.

By bargaining future benefits, both management and unions were kicking the can, same as today's pols kick the can on fiscal policy. Union leaders could wave those future benefits to their members as proof they were doing their jobs; management could wave them to their Boards as a way of preserving labor peace with a promise that would only have to be fulfilled long after all of them retired. Those future benefits were a collusion between labor and management leaders to keep the peace, and --this is crucial -- no one bothered to do the math.

By the time the chickens came to roost, it was too late. The investment returns were lower than expected, the demographics had turned as inexorably as the tides, medical costs were on the rise, and although GAAP has rules around the funding of defined-benefit plans, many plans were underfunded in the expectation that investment returns would make up the difference. Now, many companies (and governments, too --this is an even bigger problem for the public worker unions than the private) -- are simply unable to fulfill their promises, and are forced to either renegotiate them or go into bankruptcy.

Are managements (and governments) responsible? Yes. But so are the unions. Together, they buried their collective heads in the sand. Today's companies, governments and workers are holding the bag.

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What else happened to reduce union power? The obvious cause is globalization, and the access to low-labor cost markets such as China. I won't belabor that point, except to say that the impact of low-labor cost markets is already beginning to fall.

There are three other more important reasons. The first is that paradoxically, labor now holds the power over capital. Well... most labor. Not fast food workers or hotel maids. But all professionals and a growing number of blue-collar workers hold more power than ever. It's called brains. Business has become exponentially more complex and specialized, and one result of that is that companies realize the power of brains and must compete for the best -- worldwide. And while brawn (read: "old" manufacturing) lends itself well to union representation, brains do not. There are way too many specialties that don't lend themselves to broad representation. And many "brains" don't want any organization to represent them. They want to represent themselves and to compete in a meritocracy. And third, brains hold the power anyways. They don't need help and they don't want to pay dues.

By the way, if you don't believe that skilled blue-collar workers have "brains", try running a six-axis CNC machine tool, and good luck to you.

The second big reason that unions have lost power is the flip side of the first--the reduced power of capital. If you don't believe me, look at how little money it takes a bunch of teenagers with one good idea to start an internet company that's worth millions in a few months. Look at the disintermediation in the markets; look at Kickstarter; look at venture-capital and private equity funds and even micro-loan banks. I'm fond of saying that of all the resources that a business needs, money is the easiest to find. Like a rule of physics, capital flows to good ideas, and these days, ideas rule.

And third, most important: Unions lost their own way, a dozen times. They were greedy beyond reason. A unionized printing plant I ran paid its pressmen over $24/hr plus benefits -- in 1988, four years before we had to close the plant because our costs were outrageous -- and went on strike, for more. As union membership fell, the union leadership became corrupt; in 1993, at a metals service center plant I ran, I personally reviewed union documents that stated no receipts were required for "reimbursement" of union leaders' "expenses". Unions started to do more to try to preserve themselves as institutions than to represent their members; the rank and file in the second union plant I ran, with whom I generally got on well, told me every week how much they resented the weekly dues. The leadership of that union actively fought safety measures that I introduced at the request of the rank and file. 

The biggest mistake the unions made, though, was ignoring a truism of economics: Thou Shalt Not Demand An Increase of Compensation Without Helping To Pay For It. At first blush, this may seem like something out of Alice in Wonderland, but workers and unions do (sometimes) contribute to their own increases in compensation by improving productivity. Companies can well afford to pay higher wages per hour if productivity increases drive down the unit cost of labor per output. But when collective bargaining work rules are set in cement, productivity can't increase. The looniest example of this occurred back in the printing plant, which had three unions under the same roof. The unions got into a fight with each other over jurisdictional work rules, and one of the unions actually threatened to strike the others, until the three of them arrived at an agreement where a single piece of work, involving a simple transfer of printed materials from one pallet to another, was shared by all three unions. Meanwhile, as plant manager, I watched helplessly as the three unions slugged it out with each other, only to get to a solution that satisfied all them -- and which lowered our productivity and raised our costs. That was Alice in Wonderland.

The response of most unions was to circle the wagons -- to respect seniority regardless of merit, to protect the weakest in the name of representing all, to demand ever-higher compensation without offsetting productivity improvements. And they learned a painful lesson that some businesses (and some of today's governments) have yet to learn: you can't cut your way to greatness.

If there is one thing I hope the reader comes away with, it's this: Companies can afford higher wages and benefits if and only if workers, unionized or not, help to improve productivity by enough to pay for that compensation.

Of course, there are plenty of examples where this rule wasn't respected, but you don't read about them any more. Those companies are dead. 

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So, to where now for unions? It seems that there are opportunities. As the middle class becomes skived into the haves and the have-nots, the ranks of the have-nots grow. Many of the have-nots work in service industries which starkly resemble the manufacturing industries of old: it doesn't take a lot of brains to stock shelves at WalMart or to make beds at hotels, and there is a seemingly inexhaustible supply of labor for these jobs, thanks to a host of domestic factors and immigration.

The lower-paying service industries represent a huge opportunity for unions but only if they don't repeat the mistakes of the past. They need to do the math on "future" payments promises, they need to understand and account for the effects of globalization, and most importantly, they need to collaborate with management to improve productivity enough to make up for increases in compensation.

For its part, management needs to consider the possibility that a better-compensated work force might be good business. Indeed, WalMart's cost of retraining because of its huge turnover must be staggering; Costco has a completely different business model including much higher wages, and it's a successful company by any measure.

And government, and the voters, need to understand that they literally subsidize WalMart's business because so many WalMart employees can't subsist on their wages and need public help. Since when is our government in the business of subsidizing public business?

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Lastly, a teaser: There is yet another business model which flies under the radar. It's called employee ownership. Indeed, after my disastrous forays in unionized companies, I have for the last 19 years worked at a company which was partially employee owned when I arrived and which, in 2001, became 100% employee owned. 

Yup, that's right. Owned 100% by the employees; every employee who's been with the company for one year owns shares. You don't think that drives productivity? You don't think our customers aren't impressed with the quality of service they get from our machine operators? Our little American manufacturing company has seen its shares rise by an average of 16% annually over the last ten years. Some of our machine operators are retiring with multiple six-figure accounts; it's possible that in the future, some will retire as millionaires. 

I certainly hope so. More on this in a later post.