Why Unions Make Good Economic Sense – For the Employees, Anyway
From Fabio:
"Love to hear it.... [why unions make good economic sense].
I just think they are outdated by about 35years. The conditions that existed when they were in their hayday (ie excess work force) do not exist any more. They had their use then, but should go away now. Weak arguement I know, but I'm waiting to hear your reasoning first.”
My response follows.
I should clarify: the good economic reason is not one that applies to the economy in general, but rather to the workers.
When the economy is growing, there are more workers than there are jobs. With rare exceptions, we have never been without an excess in the workforce. Thus there is always a positive unemployment rate. (This may be redundant; I don't know that there can be a negative unemployment rate. However, because of mobility, an unemployment rate of 4% is considered to be full employment. Briefly, during the late 90s, the rate was below that.) How, then, is it determined which people have jobs and which do not?
There are two ways. One is that, since some industries are declining even during periods of economic growth, some workers may be temporarily out of work while preparing to switch industries. However, much of this is absorbed into the unemployment rate; thus the determination that a certain rate constitutes full employment.
The second is simple supply and demand. If there are more products available (supply) than people who want them (demand), the price must drop in order to increase demand. If more people want a product (demand) than there are products to distribute (supply), the price must be increased until enough buyers drop out and again the two are equal. In this latter scenario, one may instead increase supply, or have a combination of increase in price and supply. (Remember how the price on the new VW bug skyrocketed?)
Now, the same principle works with labor. The more labor is available (supply) compared to jobs available (demand), then the price of labor (i.e., wages) must drop. In reverse, wages must increase.
Now, these principles are necessarily applied to labor as with any other commodity, as you have indicated (though not in so many words) in your posts. However, some major problems erupt as a result of such application, which must be dealt with.
1. Inflation. Since one must set prices such that a profit is generated, prices go up everywhere. This results in a general increase in consumer prices, known as inflation. (That's the basic idea, anyway.) Therefore, a company's profits must not only equal its expenditures to break even, they must also outpace those expenditures just to keep up with the changing value of money. In order to actually make a profit, then, the company must set its prices to exceed even that. If it doesn't, its income grows less than inflation, and this results in a net loss in income even though on paper the numbers may have gone up.
Now, this also works for the employees. Since the prices of consumer goods (including the ones he makes) rise by a certain percentage each year, his income must rise at least that much, else he suffers a net loss in income even if the numbers rise. For example, John Smith makes widgets for National Widget Corporation and is paid $25,000.00 per year, starting June 1, 2002. One year later, inflation (from June to June) was 2.11% (see Financial Trends). Thus, if John does not get a cost-of-living increase (the term “raise” is inappropriate despite its widespread use) of $527.50 per year (or about $0.25 per hour, assuming 52 weeks at 40 hours per week for 2080 hours per year), his income has actually decreased – he is losing money.
Now, obviously, if Nat’l Widget does not make enough profit such that it beats inflation, it cannot increase John’s pay such that it beats inflation, even if it wants to. If it does beat inflation, however, it can. (Note that salaries are accounted for as expenses, so the company’s income is figured as being after salaries and wages are paid. Also, inflation is not considered in the accounting process, so none of what I’m discussing shows up anywhere on a company’s statements.) Let us assume the latter condition, then.
Nat’l Widget has made profits such as to beat inflation. However, it does not increase John’s pay; now John is losing money. The expected capitalistic response is that he should look elsewhere for a job that pays more. However, supply and demand being what they are (as described above), he may not be able to find one. In fact, if he complains enough, Nat’l Widget will fire him and hire someone else from the unemployment pool for $24,000.00. Now, Nat’l Widget has not only gotten rid of a complainer, but has replaced him with someone willing to work for less, and beats inflation even more, while the workers get paid less.
(Note: If you think inflation is not significant, I’ll explain to you how savings accounts are awful investments, guaranteed to lose money.)
2. Golden Parachutes. When questioned about this sort of behavior – Nat’l Widget has been in the news before – the company says that it just can’t afford to pay its employees more – profits have dropped in the last year. In fact, the company just let go its CEO of the last 2 years, for that very reason. What the company did not say was that the ex-CEO was getting paid $1M per year for those 2 years, and his severance package was an additional $3M, despite having lost the company money. When questioned about this, the company refuses to comment.
If the CEO’s severence package was halved – cut down to $1.5M – that amount would work out to be enough to give a cost-of-living increase (just to match inflation) to nearly 3,000 employees earning $25,000 per year, without causing any serious damage to the departing CEO. (Lest you consider the CEO damaged in some way, over the 2 year period, including severence, he received compensation of $5M for poor performance (and remember, line employees get fired for poor performance). If we cut $1.5M from that, his compensation is reduced to $3.5M. With that $3.5M, he can buy an annuity with a guaranteed annual return of 6%, which means he can live off that $3.5M with an annual income of $210,000, more than 8x what the employees are getting paid.)
Such claims by companies ring hollow when they make these incredible deals with executives whose loyalty changes with the wind, and whose performance is often questionable; yet they basically screw the loyal employees. For this reason, many claims by companies about how they treat their workers, and why, ring hollow. While this is probably not the case with many companies, it often is for the large ones.
3. Company earnings versus executive pay. If the company’s earnings remain flat from one year to the next – adjusting for inflation – there is no way to provide raises without cutting into either company profits or into executive compensation. Cost-of-living increases, however, can be paid. (Remember, we adjusted for inflation here.) And often they are, but not enough to match inflation. Also, of course, if the company’s profits decline (adjusting for inflation), there is no room to provide COLAs or raises.
Note, however, that even in a declining-profit environment, or even a negative-profit environment, executive pay still tends to increase. (See problem #2 above.) Thus, either the company profits must be reduced (unacceptable to shareholders), or employee pay must be reduced (unacceptable to employees and bad public relations). Therefore, layoffs will often occur, which is a bad sign for the economy; however, stock prices tend to increase, or decrease to a smaller degree, when personnel are laid off. This ultimately tends to leave employees out in the cold while still paying for executives’ second homes (or whatever).
Then, of course, while some companies offer severance packages, oftentimes economic downturns last longer than the package does. This has little significant effect on executives, however, even when they are laid off. (How many second yachts can you have?)
Thus, executives as a class rarely bear responsibility for a company’s performance. Or, if they do, it is still to a lesser degree than the line employees.
Things are, of course, much different (and better) when the company and the overall economy are doing well. COLAs usually flow annually (though they may or may not actually reach inflation). Raises and promotions are more common, particularly if the company’s profits grow more than inflation, and the company expands with more hirings, thus leading to . . . well, everything good. The only really big problem can be if inflation is high enough, and COLAs (if any) insufficient enough that one’s pay increase still results in a net loss adjusting for inflation.
Having examined how inflation, corporate golden parachutes, and the distinction between company profits versus executive pay, we can see how the real issue is not what the company can afford to do at any given time. Whatever executive management chooses to do will be painted in their favor. The real question is the degree to which executive management is considering the health of the company, and how much of that concern is really directed toward their own respective compensations. In short, how much can executive management be trusted?
Ultimately, about as much as any other human being. The classic model in political theory known as the Prisoners’ Dilemma demonstrates not that others cannot be trust, but rather than one cannot afford to trust them. At best, others will act in their own self-interest; or, at least, we must expect them to do so if we are to be protected. The question, then, is how the employees can protect themselves against management, who holds all the strings?
Unions. They give the employees a collective power to negotiate. Included in the package may be cost-of-living increases, raises and severance packages, as well as other benefits. That bargaining power would not exist without the unions. I do not deny that unions are self-serving – not as organizations themselves, but to the degree that individual people make up unions; however, they serve merely as a counter-balance against a self-serving executive management.
It is not the intent of this essay to imply that all executives, or all company managements, are loathsome creatures or evil prima facie. Rather, they are human, and thus subject to the same motives of self-interest as anyone else. To decry unions as self-serving, however, fails to note this principle. Management may be more or less self-serving than the union, but it has all the power. The union, then, functions as an effective counter-balance to preserve the self-interest of all, not merely the self-interest of some. Unions are democratic institutions. Opposition to them is not only undemocratic, but anti-democratic, and ultimately feudalistic.