Unions and Business

One of the themes of the GM debate goes like this. On the one hand, the UAW is the problem, because it’s the high cost of union labor (and in particular, union retiree health benefits) that is crippling U.S. automakers. On the other hand, the UAW negotiated for those benefits fair and square, giving up higher current wages as part of the bargain, so it’s the fault of management for making promises they couldn’t keep. On the third hand, the UAW should have realized that when you negotiate for retirement benefits from a private corporation, one of the risks you take is that that corporation might go bankrupt. (For one example of these arguments, see Room for Debate at the NYT.)

Instead of touching that question any more than I already have, I wanted to raise the larger issue of whether unions are bad for business – which is what you would assume, given the lengths many companies go to in order to prevent unions from gaining collective bargaining rights. In general, this is a hard question to answer empirically. While you can observe differences between companies with unions and companies without unions, there is a huge problem of selection bias: since companies with unions are unlike companies without unions in many ways, you can’t say whether any differences in outcomes are due to the effect of the unions themselves, or due to the effect of other factors that would be there regardless of the unions.

John DiNardo and David Lee have an elegant way of getting around this problem in a 2004 paper, “Economic Impacts of New Unionization on Private Sector Employers: 1984-2001.” (The real economists out there probably know this paper already.) Instead of comparing all companies with unions to all companies without unions, they focus on companies where the union certification vote either barely won or barely lost, since these two companies are very similar to each other except for the treatment effect (having collective bargaining rights). This isolates the effect of unionization from other characteristics of the companies in question. They find that unions that barely win an election are successful in obtaining a collective bargaining agreement. Otherwise, however, the effect of successful unionization is insignificant on the company: differences in wages, employment, productivity, and output are all insignificant.

The UAW, historically, is a special case which people can debate for as long as they want. But the evidence is that in recent decades unions are not dangerous to firm survival.

Update: I forgot to add a link to a shorter summary of the work.

By James Kwak

41 thoughts on “Unions and Business

  1. I worked as a manager for SBC Communications for three years before business school, managing a crew of 10+ technicians, all covered by the CWA union. In comparing my experience in a few different work groups and that of my peers, I observed that a “bad union” was almost always paired with bad management.

    Unions provide another set of constraints for business managers to deal with. But, successfully optimizing to those constraints (in addition to all the others) can mean a more engaged and aligned workforce than you might otherwise achieve.

  2. Otherwise, however, the effect of successful unionization is insignificant on the company: differences in wages, employment, productivity, and output are all insignificant.

    (I have not read the paper yet, so apologies if this is a stupid question.)

    Do these results imply that there is no advantage to the workers from unionizing, either? That the outcome is wash from both sides’ point of view?

    Or is it somehow a “workers win, but nobody loses” proposition?

  3. I’m only a layman — and besides, I just read the abstract — but my first thought is that the success of the union may be highly conditioned on the level of union support among the workers. It strikes me as important work; it shows that there’s nothing magical about collective bargaining that radically changes wages. But it doesn’t seem to settle the question.

    Are there any examples of companies in similar industries which don’t have unions (e.g., through active suppression by the employer) versus ones where unions passed by a wide margin? If the same effect was observed, I’d think that would be more suggestive.

    That said, I appreciate that it’s a lot easier to sit back and formulate ideal experiments than to actually find the data and do the analysis. The union question is very important, and the public debate on it is regrettably simplistic and biased. Work like this, shared like you have, helps us move beyond that. So thank you.

  4. Not an economist – and don’t know if unions today are “good” or “bad” for business.

    It seems to me, however, that the need for unions resulted from exceptionally bad management decisions in years past that treated labor terribly.

    Are unions still needed today? That is a question I cannot answer.

    However, we today see a scenario where a GM executive who occupied the C-suite for nearly two decades just drove off into retirement with a $20 million package. Rick Wagoner led his company into a situation where it survives thanks only to the government bailout.

    So why is his performance rewarded so astronomically? Why isn’t executive compensation ever mentioned when talking about the detrimental impact of wages on the auto industry?

    What is the economic cost for compensating executives without regard for performance?

    Has the astronomical increase in executive compensation helped or hindered American business?

    Are Walmart employees better off/better paid/better compensated without the union? Or would they benefit from collective bargaining?

    Would the airline industry be better off if there were no unions butting heads with executive leadership? Certainly, American Airline unions have been powerless to prevent executive leadership from divvying up hundreds of millions of dollars in bonuses to themselves as they concurrently forced employees to take deep cuts in compensation in the last few years.

    I think unions have suffered from mismanagement – like other areas of American business – but they’re still facing a formidable foe – executives who want much for themselves and little for the rank and file workers.

    As a non-economist, I think the question we need to focus on today is how executive leaders in multiple business sectors have failed to create or sustain profitable organizations – and yet continue to pay themselves incredible salaries and bonuses.

  5. Academic economists have pretty much destroyed their reputation through politicization of their research. What a surprise, they’ve decided that labor unions have no impact.

    Anything that reduces control over risk capital adversely impacts risk/return. Treat capital badly and it will return the favor. Left leaning economists can pump out their elegant models til the cows come home, but it won’t change reality and reality is looming large right now.

    But, I’m all for giving it a shot. Let’s ramp up union control over American business. Let’s see how that affects our global competitiveness at a time when America has tapped out the foreign credit line. I’m ready to compete in the resulting jungle.

  6. So let me get this straight. Some economists write a paper. You have nothing to say about their facts, methodology, or presentation; in fact, you probably have not even read it… But since their conclusion conflicts with your own ideology, they “have pretty much destroyed their reputation through politicization”?

    Got it.

  7. I’d like to nitpick a bit. GM (and other companies) didn’t make “promises they couldn’t keep.” They CHOSE to not keep them – and instead of setting the promised money aside they distributed it to executives and shareholders.

  8. That’s right, because I don’t need to read their paper. If they publish another one tomorrow saying that the sun actually rises in the west, I won’t need to read that one either. The output of the academic left consistently reflects their idealogy. Sort of like reading the NY Times editorial page; the conclusions are foregone before the data is analyzed.

    As for labor unions, go ahead and give labor more control over risk capital. I always enjoy watching the left run their constituencies into the poor house. Don’t worry about the capital, it’ll go somewhere else.

  9. Is that for real? I ask that sincerely, I was under the impression that they’d been putting the money aside but things like health care costs sky rocketted so far/fast that the models the money being put aside were based on just couldn’t predict what was needed.

  10. Unions are good in that they allow labor to negotiate collectively for living wages and benefits. Most health and safety concerns are now dealt with by government regulation.

    However, unions shoot themselves in the foot when they start negotiating for ridiculous benefits (being paid not to work; demanding computers, then demanding a pay increase because of “change of working conditions” represented by having to use computers at work) and engage in frivolous and very costly litigation when management wants to manage (e.g. fire an poor performer, or reassign workers to a more needed area). This is also why larger numbers of Americans, including the non-union working class, are beginning to look askance at unions.

    Summary: Unions should “cut the BS” and stick to negotiating a fair wage and we’d all be better off.

  11. I’m with Nemo on this one. Here we have two competing models. One is purely theoretical: “Anything that reduces control over risk capital adversely impacts risk/return.” The other is empirical, meaning that it actually looks at the world.

    I’ll take the empirical one.

  12. There’s always the tendency to look at unions and attempt to draw correlations to the benefits and companies having financial problems. This can be an appropriate exercise but not in a vacuum. Whenever people mention unions to me, the first thing I tell them to do is consider executive pay and compensation along with the same of union members. If you can look at GM for instance and see that while management, despite NOT being represented by the union has benefits on par with the union or as often tends to be the case, that outstrip the packages of GM’s union represented, then maybe the union is not the blame. If management is crying about the union remember that every company with union represented staff has non-union represented staff (management). If by some wild stroke you find a company where management has sub-par benefits, while its unionized line workers are living it up on full medical then I’ll say, “that unions a problem”.

    When looking at corporations or even any work place, you consider the benefits packages of all employees, union and non union alike. This is necessary because typically, businesses get good rates for health coverage and other perks the more people they have to sign up. Don’t be naive and think management IS NOT going to use the total number employees it can bring to bear to negotiate good rates.

    Let’s be honest, even when you consider perks and bonuses at companies that don’t have unions, upper management still is walking away with a mint. From some of what I’ve read and seen, the salaries of employees that are not union represented, don’t ordinarily keep pace with inflation or if so just barely. Union represented salaries tend to attain raises and better benefits than none union represented salaries. Given that owners and ceos of union and non-union represented employees tend to have the cream of the crop where compensation and benefits are concerned, there are only a few assumptions that you can reasonably assume.

    1. Upper management for whatever reasons always has good benefits period, whether there is a union presence or not.

    2. Without unions management is less likely to insure that workers salaries and benefits keep pace with the economy though ceo salaries of late have outperformed everything bar non.

  13. Hey James, round up some of your academic friends, go start a business and run it for 30 years. Get back to me and we’ll revisit the concept of theoretical vs emprical. BTW, nice technique for squelching dissenting opinion on your blog. Just disable the reply function.

  14. If he wanted to “squelch” your opinion, he could delete your comments. Instead, he is giving you ample rope to hang yourself. Please continue.

  15. I observed that a “bad union” was almost always paired with bad management.

    Fred’s latest comment inclines me to suspect that Mark is onto something here.

  16. Actually, notwithstanding the press from millionaire Sunday gasbags, the problem that GM and Chrysler have is with BONDHOLDERS, not UNIONS.

    It’s Pim(p)co, et al. who are not negotiating in good faith. The unions basic position is that their haircut should be roughly equivalent to to that of the bond holders.

    I would also note that a lot of the difference in labor costs, is not the retirees, but the AGE of the CURRENT workforce, same as with the airlines interestingly enough, and the idea of penalizing companies with an older workforce is morally wrong.

    As an aside, a lot of these problems get fixed with government managed healthcare.

  17. For some reason the blog software doesn’t let you respond to 3rd-level down comments in the normal way. Never has.

    If you want to respond to James in the earlier thread, you can click reply under Nemo’s comment and your will show up under James’.

    Try to keep it vaguely civil and keep the paranoid accusations to a minimum, this is one of the few places on the web I can still read the comments without going completely insane.

  18. >On the one hand, the UAW is the problem, because it’s >the high cost of union labor (and in particular, union >retiree health benefits)

    I know this is not the main thrust of the entry – but these kind of questions really miss the most important aspect in these discussions. What is the *value* of the output of labor (union or non-union) in the marketplace and how do you compare these against companies in the same sectors and operating under similar market conditions. By value of output you could empirically talk about quality, consumer perception and productivity by hour.

    For instance getting GM’s hourly labor in parity Toyota will “help GM” assumes that all other factors are equal. But they’re not. If Toyota workers are still more productive (producing more units in less time), have a higher quality (empirical and consumer perception), are more adaptible and flexible to changing market conditions requiring changes to business – then the simply hourly labor cost will not make a difference in GM’s recovery. I don’t have the data on those elements in front of me, but it’s out there, and it seems to indicate that GM could lower it’s labor costs significantly, Toyota could raise them – and Toyota might still ‘do better’ in the market place because the value per unit of labor they get is so much more lopsided.

    On a simpler analogy – if it turns out Microsoft and Apple pay the same hourly rate to produce a Zune and an iPod, that doesn’t mean the two will benefit at the same level for producing those products.

    Where does this lead us? As another poster said whether “union or non-union” is not the right question. “What is the value produced”, be it union or non-union, is the key. And that may be more indicative of specific union-management relations at specific companies, rather than a broad “are unions good or bad for business”.

    Does that make sense?

  19. I would also wager that unions contribute to a calcification of job categories, processes, roles and responsibilities of the workers. Time is a variable, and everything changes with time. The ability to rapidly adapt in the workforce to changing conditions would be a net positive to an enterprise, and the role (if any) a specific union plays in retarding that change could be described as a net negative. That doesn’t mean management insisting on enforcing the status quo aren’t creating an equal or greater net negative as well.

  20. The real issue with GM ain’t the unions, it’s the bond holders who are trying to extort as much as they can.

    I would note that in the future, unions will learn their lesson, and cash will be king.

    Additionally, a portion of the higher labor costs, much as it is with legacy airlines, is simply the age of the work force.

  21. Well said.

    Econometrics I’d suggest is only slightly relevant here. There is a bigger issue that needs consideration. For approaching 30 years it has been a key assumption of governments in developed economies (eg USA and Britain) that more rights and freedoms for capital are good, and fewer rights and freedoms for labor are also good. Consider, as an illustration, how much easier it has become since 1980 to move money across borders, and then consider if there has been a comparable easing in the right of labor to move across borders. It didn’t happen.

    What did this adoration of capital and disdain for labor bring the world? The Global Financial Crisis. A crisis that originated in the USA and UK – and has hit those two finance-infatuated countries very hard.

    It’s a cultural issue. If you don’t want a repeat of the Global Financial Crisis, try to get in the habit of respecting labor.

  22. Quick comment:

    DiNardo and Long are effectively using something very similar to an instrumental variable model. If the treatment effect is random (or nearly random, in their case) then the opportunity for bias or reverse causation is is low. It’s very hard to argue against an IV model.

    In other words, it’s entirely unfair to say that the authors are manipulating the model to get a desired (political) outcome. The people who put down good work like this are the same people who dismiss science in general, or present opposing scientific “viewpoints” as equivalent without regard to the weight of the evidence on either side.

    As wonderful as IV models are, however, they tend to be noisy, even with a lot of data. Moreover, the outcome variable here is perhaps not ideal in the sense that mere survival is a very poor indicator of success (particularly over a relatively short period of time, only 17 years at maximum, and less depending on when the event occurred within the dataset – it took 60 years post WWII for the car companies to approach death).

    So this primarily shows that, controlling for other effects (including the average degree of unionization within an industry and time period), the creation of a union does not have a large and immediate effect on firm survival. One might expect this, especially since unions have strong incentives to preserve their firms _existence_ (look at UAW vs. the GM creditors), but not necessarily their firm’s _profitability_. This does not immediately show that unions do not extract rent, although the paper shows that unions don’t have a huge effect on wages either… (At least, not measurable with the error bands they suffer.)

    The paper also does NOT show that unions have no effect in a broader sense, or more specifically, that the degree of unionization within an industry or country has no effect.

    In other words, one could still argue that in an industry that’s 80% unionized, even non-union shops can “free-ride” in the sense that they get the benefits of _other_ shops being unionized. Likewise, in an industry that’s only 20% unionized, the union shop is not likely to be able to demand significant gains vs. non-union shops due to lack of bargaining power. This is what DiNardo and Long imply when they say most of the new unions were probably “weak”.

    So the paper only shows that marginal unionization (aka, unionizing a shop without necessarily unionizing an industry) has minimal if any effect on on short term survival, at least for the class of firms that have pro-union votes at ~50% (where they are trying to measure the discontinuity).

    Still a great paper, that is due some respect.

  23. @Lun, see below.

    The paper does not make claims about overall levels of unionization, just on the marginal impact of unionizing a firm holding the industry unionization level constant.

  24. Well, firm survival is a weak and delayed metric of value of output, assuming that the market is working reasonably well.

  25. Unions are great until TWO things happen:

    1. The union leaders become completely unrealistic in their demands (you just cannot pay a guy $75 per hour to bolt a bumper on a Buick, and remain competitive)
    2. The CEO and Board Of Directors cave in to the unrealistic demands of the Union, all the while assuming the thing won’t blow up until after they are gone.

    And, unfortunately, both of these things happen often. Can you say “General Motors”?

  26. Whether you look at unionization at the macro or micro level, there will be cultural influences on the behaviour of capital and its managers. Many companies may go to great lengths to keep unions from gaining rights; but that does not indicate such behaviour is rational (despite James inferring rationality into the behaviour). It may be because there is a widespread, irrational belief that unions are a threat (a bit like the widespread, irrational belief that American free enterprize was the best in the world).

    DiNardo and Lee may have done interesting work; however their work has been overtaken by events. The question – are unions bad for business? – is today, irrelevant, at macro or micro level. It’s the American business community that has proven, empirically, what is really bad for business. It, itself, and its gift for self-delusion, is what is bad for business.

  27. How about this: labor and management start working for the same team. One big happy union. Then companies won’t compete anymore; there won’t be any companies. Too comfy staring at your monitor in a climate controlled building? Take-out sushi 5 minutes away and Jon Stewart waiting for you on the DVR? Who cares…

  28. I am a member of a Union. I find missing in the various debates on the subject of Unions and Economics questioning what a successful business is. Walmart is often rates as one of the most successful example of American Capitalism.

    But what they have done is make their workers depemdand on them in the same manner as the Factory Store in the late 1800’s and early 1900’s. They have made American defendant on Chinese workers who get nothing.

    So is that successful.

    Look at Walmart and Health Care. Pushed by the Unions Walmart went from secretly instructing its employees how to go on welfare to get health care to providing albeit not very good health care some health insurance. The have also come out with the cheapest prescriptions you can find.

    The do not appear to be headed for Bankruptcy.

    So successful depends on?

  29. I’d agree here. Without the ability to make performance based cuts and instead being forced into the “last-in/first-out” rules, we’re hamstringing management. Unions themselves aren’t evil, it’s the excesses of unions that have gotten us into trouble.

  30. Thanks for pointing that out. There is a blog-level setting that allows me to control how many levels deep the comment threads can go. I picked 3 for no particular reason – I’ll make it deeper.

    Oh – and I did start a company, by the way. It’s doing quite well. I try not to talk about it, but sometimes I get provoked.

  31. Which excesses are you speaking of. There are no unions on Wall Street and excess has clearly run amok. This is why I said that most of the stuff people would attribute to unions can be found in non-union represented management. You will not find any place of work where management has worse benefits than the company’s union represented employees. You will also not find management anywhere that won’t use its total number of employees to get better benefits for management whether line staff are union represented or otherwise. No matter that upper management tends to far and away have better benefits and perks than line staff. The fact that here in the US people routinely deride unions when non-union represented staff across the country see benefits and salary erosion in the face of rising inflation, appears to indicate that there is a foregone conclusion and acceptance that line staff will and should be totally reamed by management. Especially when considered that bad decisions by management and the ensuing cost cutting disproportionately affect non-management, who tend to live with the bad consequences more. Translation: Despite the fact that non-union represented employees receive fewer raises or even cost of living increases and lost more health benefits either outright or have to pay more in to maintain less coverage and then they get fired or laid off first for management decisions. If you consider unions excess then sign me up for some of that. Corporations without the help of the union nearly bankrupted this country, so how people have such trust for management is beyond me. Even where the automakers were concerned, poor design more than anything killed them.

  32. if you are talking about product design here, why couldn’t GM hire a comparable design team to Toyota’s?

    what i have heard — and i am not an expert — is that GM’s cost structure in the US is much higher than Toyota’s and that is the main difference. the implication is that union wages and legacy benefits are a big part of this. i haven’t looked at the numbers myself, so i don’t know if this is just an opinion from some ideological people.

    however, the line of reasoning makes sense. it’s not useful to argue this without these numbers in context.

  33. “GM’s cost structure in the US is much higher than Toyota’s and that is the main difference. the implication is that union wages and legacy benefits are a big part of this.” Consider that Japanese car makers have union represented employees here in the US, but significantly younger. So if Toyota has only had union represented employees for 5 years, then it stands to reason they don’t have nearly the number of retirees as GM. As Toyota’s employee base here in the states age and they have to honor those contracts, they can find themselves in the same situation as GM is today. In the same manner as CEO pay tends to trend upwards, though not as lucratively, union salaries tend to trend up as well over time. Thus, as a new CEO finds his starting salary lower than his predecessor, it will be higher than the rate that his predecessor started at. The same is the case for union represented new hires too.

  34. find me one UAW line worker who gets paid $75 per hour ($156K/yr) In 2007, GM stated its typical line worker earned a base wage of $28/hr. The new starting wage is $14.50/hr or $30,160/yr

  35. Unless that empirical evidence includes Rush (insert fred’s favorite theoretical savant here) saying ‘Unions might not be bad’, fred has no use for it.

  36. Read Buffett’s latest investor letter. Owner’s of insured debt behave differently than owners of uninsured debt. I suspect Pimco has insured its debt and doesn’t fear outright default.

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