The Problem With Unions

From a macro-level by Richard Posner:

Current union hostility to immigrant workers is consistent 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.

From a micro-level by Pajamas Media:

One afternoon I was helping oversee the plant while upper management was off site. The workers brought an RV into the loading yard with a female “entertainer” who danced for them and then “entertained” them in the RV. With no other management around, I went to labor relations for assistance. As a twenty-five-year-old woman, I was not about to try to break up a crowd of fifty rowdy men. The labor relations rep pulled out the work rules and asked me which of the rules the men were breaking. I read through the rules and none applied directly, of course. Who wrote work rules to cover prostitutes at lunch? The only “legal” cause I had was an unauthorized vehicle and person and that blame did not fall on the union workers who were being “entertained” but on the security guards at the gate. Not one person suffered any consequence.

All articles referenced are copied in full at end of post.

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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.” http://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.
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Detroit’s Downturn: It’s the Productivity, Stupid

There has been a lot of finger-pointing about who has put the American auto industry in a ditch, sending it hat in hand to the taxpayers’ ostensible representatives in Washington. There seems to be a broad consensus that Detroit’s problems were caused by inept and arrogant management, unimaginative car design, poor quality — though this has improved somewhat over the past couple of decades — and overpaid union workers. While there is less agreement on how much to weigh each of these factors, only the latter is attributed to the UAW. There also seems to be some dispute over what their compensation actually is, but most agree that it’s uncompetitive with the foreign transplants, largely in the south, though Honda builds cars in Ohio. Of course, the fact that the non-union companies are in the south has resulted in predictable accusations that southern Republicans are playing politics and trying to destroy the union to the benefit of their home-state companies — ignoring the fact that General Motors has a plant in Tennessee, the home state of the most prominent bailout opponent, Senator Bob Corker.

The UAW is seen to have been the winner of the current round because, while the Senate Republicans held up the Congressional bailout to them (though it should be noted that their votes weren’t necessary to pass it — only to provide political cover to the Democrats, who had sufficient Republican votes to push it through), the White House capitulated and seems on the brink of offering them the money anyway.

But almost all of the discussion, when it comes to UAW culpability, has been on wages. The even larger issue, though, is the elephant in the room that seemingly no one discusses, even when given a political opportunity. For instance, I saw a “debate” on Fox News recently in which the Democrat defending the union said that it was partly management’s fault because of the poor quality of the cars, and the Republican failed to respond. And it’s not like people are unaware of it, at least people familiar with the industry. The issue isn’t wages — though those are a problem — so much as work rules. UAW work rules, which have evolved over the many decades since the passage of the Wagner Act, are the biggest reason that General Motors is uncompetitive with its non-union American counterparts.

What are work rules? They are agreements negotiated in the contract between management and the union covering how the employees are to be classified, how many breaks they get, how much time off they get, who can do which jobs, how discipline is to be enforced, etc. The goal of the rules is not to enhance productivity or production quality. It is to provide opportunities for featherbedding, increase numbers of (overpaid) jobs for union workers, and minimize how much they have to actually work. This is important because it’s at least in theory possible that the industry could be making money even at current wages, if they could be provided with the flexibility to increase worker productivity. When you blame management for the quality and cost problems in the auto industry, first consider stories like this:

As a former supervisor of UAW workers at a GM facility, I will say that poor management and union malpractice made the Detroit Three uncompetitive long before the government sent in their arsonists.

To put it bluntly, the UAW takes the hard-earned money of the best workers and spends it defending the very worst workers while tying up the industry with thousands of pages of work rules that make it impossible to be competitive. And the spineless management often makes short-sighted decisions to satisfy the union and maximize immediate benefits over long-term sustainability.

The strength of the union and the weakness of management made it impossible to conduct business properly at any level. …

I supervised a loading dock and 21 UAW workers who worked approximately five hours per day for eight hours’ pay. They could easily load one-third more rail cars and still maintain their union-negotiated break times, but when I tried to make them increase production ever so slightly they sabotaged my ability to make even the current production levels by hiding stock, calling in sick, feigning equipment problems, and even once, as a show of force, used a fork lift truck and pallets and racks to create a car part prison where they trapped me while I was conducting inventory. The reaction of upper management to my request to boost production was that I should “not be naive.”

One afternoon I was helping oversee the plant while upper management was off site. The workers brought an RV into the loading yard with a female “entertainer” who danced for them and then “entertained” them in the RV. With no other management around, I went to labor relations for assistance. As a twenty-five-year-old woman, I was not about to try to break up a crowd of fifty rowdy men. The labor relations rep pulled out the work rules and asked me which of the rules the men were breaking. I read through the rules and none applied directly, of course. Who wrote work rules to cover prostitutes at lunch? The only “legal” cause I had was an unauthorized vehicle and person and that blame did not fall on the union workers who were being “entertained” but on the security guards at the gate. Not one person suffered any consequence.

Another employee in the plant urinated on the feet of his supervisor as a protest to discipline. He was, of course, fired … that is until the union negotiated and got his job back.

These are anecdotes, but there are too many of them, not just from her, but from many, to be merely anecdotal.

I grew up in Flint and my father was a GM executive. During college, I worked summers on the factory floors of AC Spark Plug and Fisher Body. As an (involuntary) member of the union, I could certainly see the benefits. At the age of twenty, I had one of the best jobs of my life for a few weeks.

Why?

Union rules.

I was in theory responsible for keeping parts flowing through the entire plant. They ran on little slidewalks, like you walk on in airports, far above the floor. There were gates to divert them to the proper lines, and tables where they would congregate and fill when lines were down, like reservoirs with dams. There was a robot that I could command to pull pallets off a rack and replenish the tables. And, as one might imagine, there were lots of things that could go wrong.

A breaker might trip on the robot. A gate might jam, causing the reservoir to fill and the parts line to be depleted, making the workers below unable to complete the assembly of an oil filter. And when these things happened, what was I supposed to do? If a breaker tripped, I was supposed to put in a repair ticket for an electrician. If a gate jammed, I was supposed to put in a ticket for a pipefitter — it may even have been a special subclassification for an assembly-line upper-level pipefitter. If a belt jammed, I was supposed to requisition a machinist, any of whom might be busy on other jobs. Or outside, taking a nap in their van. While waiting for them to arrive, assembly lines, perhaps even the entire plant, would be shut down, costing thousands of dollars a minute with workers sitting around unable to assemble the product.

I was an engineering student who had been tearing down and putting cars back together my whole life. I knew how to turn on a breaker. I knew how to unjam a pneumatic gate. The supervisor and I had an implicit agreement. I would ignore the rules and keep the plant running, and he would let me do whatever I wanted up on the catwalk, by myself. Most of the time I read or studied or even napped, while working sixteen-hour shifts at double time, but keeping one eye on all of the mirrors that showed progress or problems on the parts flow. When something went wrong, I fixed it, instead of putting in the repair ticket. Only once, when I napped a little too long and a line dried up, the supervisor came up and woke me. I still fixed the problem much faster than it would have been fixed had we waited for the skilled tradesman to show up, and he had no problem. As I said, it was a great job and all because of union rules.

But as someone interested in business and free markets, I could also see that this could not go on, when the foreign competition was becoming very appealing. When something can’t go on, eventually it doesn’t. That’s where we are today.

And the rules don’t just affect productivity — they affect quality as well. When you can’t discipline employees for being absent without leave, when you have to bring in unfamiliar workers to fill in for them, when you’re missing half your plant during hunting season — yes, the stories about avoiding buying cars built on Monday or Friday in the fall are true — you can’t expect to put out a quality product, regardless of how well or poorly designed it is. You particularly can’t expect to do so when the union rules put all responsibility for quality and production on management, but give them no authority to manage the workers and provide the workers with no incentive to build a quality product if they lack the personal pride to do so. Volumes have been written about Japanese management style and worker teams and consensus, but even if GM/Ford/Chrysler management had wanted to do so, there was no chance of it with the UAW mindset. And as sometime auto industry (and union) observer Mickey Kaus has pointed out, this was not just an unintended consequence of work rules — it was the goal.

I’m not unsympathetic to the workers. As noted above, I was one. It’s a terrible, mind-numbing job. The reason that I was up in that loft was that I spent the first couple of weeks on the line, where I watched a woman assembling filter after filter, like an automaton, and wondered how she did it for hours. My job was to load the parts on the line from a bin to feed her efforts, and I quickly figured out I could just put the parts on one at a time at the same rate she built it and work continually, but that if I quickly filled it all the way to the back — like the beginning of the checkout roller in a grocery line — I had about forty-five seconds before I had to do it again and could read a couple of pages of a book. The supervisor observed me and shortly after I was promoted upstairs.

Yes, I can understand why they want to get paid a lot to do that kind of work. I wouldn’t do it for less. Right now, I wouldn’t even do it for what they make. But there are a lot of people in this country that do exactly that kind of work or worse, and get paid a lot less — a lot less even than the non-unionized auto workers in the south. And because I didn’t like what I was getting paid for what I was doing, I sought better work and pay, by improving myself and getting an education. Ultimately, while there are some people who may not be capable of that, I suspect that many of them are not as discontented as I would be to perform a repetitious job each day. And because people who could do other, more interesting, more challenging, even more productive things were making so much easy money in the shop, I suspect that over the years both Michigan and the nation has lost a lot of productivity by not providing them with incentives to go out and do them, rather than being a shop rat all their lives.

The auto workers and I grew up in a golden era that it was unrealistic to think could continue. They were so well paid and unproductive, not because the market valued their labor at their wages and their product at its prices, but because they had a foot on the throat of the industry management, thanks to the imposition of the government via the Wagner Act and the NLRB. When each contract came up for renewal, they could single out one company, use the strike funds accumulated from workers at all the companies, and literally threaten to kill it. The next strike, they could do the same to the next one, continually imposing new rules, benefits, and restrictions that strangled the entire industry slowly instead of cleanly killing one company at a time. Remember that too when you blame management for all the problems.

Some have claimed that the only goal of the Republicans was to break the union. Well, if that — or at least breaking the work rules — wasn’t one of the goals, it should be, because there is no saving this industry without doing so in some form. After all, the union played a major role in breaking it. If we could do so, the Wagner Act, a relic of the Depression and New Deal, should be repealed or at least revised as well. Unfortunately, with the party and mindset that passed it over seventy years ago once again in power in Washington, they seem much more likely to dramatically worsen it and spread the infection to the rest of American industry.
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