Policy Issues

The Labor Union Challenge

Human nature being what it is, those who prosper under a given system tend to become supporters of that system. Thus the powerful tend to have a bias toward the status quo.

- Salman Khan, The One World Schoolhouse

Last month, college football players with scholarships at Northwestern University were granted the right to form a union by the Chicago regional National Labor Relations Board. This means that these athletes, who spend “40 to 50 hours per week” practicing during the football season, may finally be acknowledged as college employees rather than students.  This distinction between student and employee is a big one – for years, top college coaches have pulled in millions per year in income as “employees”, while the “student” athletes themselves not only collect nothing, but are also penalized for accepting endorsements. Writer Michael Lewis calls these athletes “serfs of the turf”, playing in an unfair system where “everyone associated with it is getting rich except the people whose labor creates the value”. Less than 1% of college football players will play in the pros, so this might be all they’ve got.

Last week, Northwestern University filed an appeal with the National Labor Relations Board against the ruling. Why? Because unions can bring significant costs that can get in the way of an organization’s goals. The right to form a union will bring some positive things for these athletes including the abilities to bargain for better workers’ compensation benefits, to set limits on their working schedules, and to call for salaries.

Why Unions?

Union formation enforces an organized way that employee interests are represented, and having a dedicated group allows for focus on creating favorable laws and organizing negotiations with their employers. While a corporation works to maximize value for its shareholders, unions are a balancing act to ensure that workers are protected in this process. It is for this reason that former Secretary of Labor Robert Reich says that “every major big-box retailer and fast-food outlet in the nation” should be unionized, as well as “every hospital in America.”

Take Walmart, which has been hounded for paying low wages (sometimes below the minimum), cutting employee hours down to ensure they don’t qualify for full-time benefits, and violating workplace discrimination laws. There are even webpages such as “The Good, The Bad, and the Walmart” and a Wikipedia article dedicated to “Criticism of Walmart.” Forbes writer Tom Van Riper reports there are 17 lawsuits against the company everyday.

Wal-Mart workers rallied outside a store Thursday in Pico Rivera, California. Source: New York Times

Employee bullying doesn’t just happen in the private sector. Before teacher unions, public school administrators could fire teachers at will. If a teacher questioned a principal’s orders, or if a parent complained about her child’s teacher, that teacher could be removed without due process. During the Communist witch-hunts in the 1950s, New York teachers could be fired if they showed signs of being “subversive”. These conditions set the stage ripe for the emergence of teacher unions in the 1960’s.

Labor Union Monopolies

Like any other organized entity, unions can become extremely powerful and manipulate the greater system in their own favor. An important distinction to make is that the stated goal of a union is to protect the interests of its current members, and this can be at the expense of the customers, the corporation, the government, the unemployed, and the non-unionized workers.  According to The Center for Responsive Politics, eight of the top ten all-time political contributors are labor unions.  While labor unions are an important check against corporations, is there a balancing loop against powerful unions to prevent the success to successful archetype from dominating?

Labor unions enjoy the privileges of being exempt from taxes and antitrust laws. Harvard Economists Freeman and Medoff found that most labor unions actually have monopoly power over workers, but exemption from antitrust laws make it perfectly legal for one powerful union to control the agenda for the workers it “represents”.  How should we feel about that?

Well, we know that for corporations in the private sector, people perceive monopolies to be bad because they restrict healthy competition. For example, the diamond company De Beers exercises its monopoly over the world’s supply of diamonds by artificially restricting diamond supply to the consumer market, resulting in the perception that diamonds are “rare” and the creation of a market where people are willing to pay thousands for a mineral that was previously worth little. So when private sector monopolies dominate an industry, the costs get transferred to the customer (except for the case of natural monopolies).

How does this apply for a labor union, an organization with a monopoly over an employer’s labor? Do the costs fall on the consumer or the employer? It depends on whether the employer also has a monopoly.

Who Bears the Costs?

who bears the costs

1) If the labor union monopoly is part of an industry where the employer is also a monopoly, then the majority of costs get passed to the customers.

Take the example of the Detroit automakers (Ford, GM, and Chrysler, or “the Big Three”) and the United Auto Workers union. From the 1950s to the 1970s, every US autoworker belonged to the UAW union monopoly. At the same time, the Big Three dominated the American automobile market together as an oligopoly. As David Halberstram wrote, they were “one big company with three divisions”. There was essentially no competition. This market position meant that the costs of whatever concessions the UAW negotiated from their employers – better health care, pensions, or pay – could be in turn passed to the customers.  In a normal competitive environment, the market’s feedback effects would have been able to signal to both the UAW and the Detroit oligopoly that their high prices – and the handsome benefits those prices are supporting – were a poor deal to consumers.

2) However, if the labor union monopoly is in an industry where the market is competitive, then the majority of costs get passed to the employer and their profit margins take the hit. Take a look at the image below.

Detroit Auto Sales began their sharp decent in the mid-90's. Source: Econosseur

Detroit Auto Sales began their sharp descent in the mid-90′s. Source: Econosseur

The Detroit oligopoly eventually fell apart with the rise of foreign imports such as Toyota, Honda, and Volkswagen. Losing market control meant that Detroit did not have guaranteed customers that would accept their price hikes and lower quality vehicles. Customers instead flocked to other automakers, and the Big Three were unable to adapt. In the long run, GM filed for bankruptcy, Chrysler was sold to a foreign car marker, and Ford went on the brink of bankruptcy too. Autoworkers saw huge losses in wealth and gains, and Detroit became an urban wasteland.

For the reasons stated above, unions have enjoyed greater success and stability in the government sector where the employer itself is a monopoly.  In 2013, the unionization rate for public-sector workers was 5 times that of the private sector (35.3% vs. 6.7%). Even within the private sector, unionization rates are highest in heavily regulated industries – the transportation and public utilities sectors.

union membership public vs private

 

Unions have continued to thrive in the public and regulated sectors because of their employers’ protected positions. When the union’s employer is no longer a monopoly the union and the employer together are often ill-prepared for the rigors of market competition. Union leadership has generally taken one of a few ways to address this problem. One is to work constructively with employers to make strong long-term choices. The other is to attempt to exercise political power to help the employer maintain a monopoly position.

Labor Union Mission Drift

Unions can enforce mandatory union dues from all employees under its umbrella, regardless of whether these employees agree with union practices and want to be part of the union. If workers don’t have a choice of which union to join and whether they want to be in one at all, then the idea of union representation is a mirage. However, a sound argument for mandatory dues is the free-rider problem, where people don’t voluntary pay for a service but still reap its benefits.

Additionally, union leadership may drift toward pushing agendas that serve the few at the top within the union. The United Farm Workers union – famous for both its founder Cesar Chavez and its job of unionizing abused migrant workers in California – was recently exposed in the news for having a $100M pension fund that serviced just a few thousand workers.  Long tenured members – who have the most at stake in terms of work put into the organization – increasingly pull back the goalposts on highly valued benefits like pensions, healthcare, and job security while lower tenured members of the union miss out despite paying dues.

Case Study: Teacher Unions

Teacher unions got started in the early 1960s, when Albert Shanker organized the United Federation of Teachers in New York. The union threatened the first ever teachers strike on the day John F. Kennedy faced Richard Nixon for the election. Union leaders understood that Democratic candidates running for office wouldn’t risk the negative publicity of squaring off against the labor unions. The union’s first contract in 1962 was 39 pages long, and it set a starting salary of $5,300, more than double the amount a decade earlier. Three years later, the contract was 75 pages and the salary, 30% higher. Four years after that – 111 pages and a starting salary of $11,000.  Within 7 years, the contract and salary each more than doubled.

Over time, the union contract would get longer and certain groups began taking notice. More recently, mainstream documentaries such as Waiting for Superman and organizations like Democrats for Education Reform began pointing fingers at powerful unions in certain states  for standing in the way of the drastic reforms to improve public education, especially in low-income neighborhoods.

Teacher unions in some states have also shifted toward oligarchies, institutions that serve those at the top. In California today, unions have negotiated a “last in, first out” policy where districts facing budget shortfalls must lay off the newest teachers first, regardless of their quality.  Salary is tied to the number of years of teaching experience rather than a combination of metrics that may better assess skill. Meanwhile, teachers are granted tenure after just 18 months. Most people would agree that this type of incentive structure does not reward the best talent, benefits the most senior level members, and in general devalues the teaching profession. These issues are at the center of a lawsuit brought on by 9 students and backed by advocacy group Students Matter last month.

In New York City, teachers had become so difficult to remove that NYC school chancellor Joel Klein created “rubber rooms”, sending 600 teachers accused of physical misconduct and incompetence to holding rooms where the purpose was to remove them from the classroom. Meanwhile, these rubber room teachers were still fully employed – they got paid 6-digit salaries, enjoyed summer break, and accrued pension benefits.

rubber room cartoon

Unions with too much power put their employers at a competitive disadvantage, which ultimately hurts both the employer and the union. Therefore, it is in the long-run interest of both parties to play nice with each other in order to avoid irrelevance.

We don’t often hear that public schools are regional monopolies. Yet in many U.S. public school districts, students cannot choose their schools and instead, their zip codes determine where they will spend their K-12 years. Meanwhile teacher unions have demanded and received many concessions – pensions, seniority-based pay, low tenure standards, and control over working conditions and practices. As long as district schools held their monopoly power, most costs got passed to students and the community at large, both financial and educational.

But with the introduction of charter schools, a new competitive vehicle threatens the dominance of traditional school districts. Charter schools by law must be open to any student wishing to attend, holding a lottery when desired enrollment exceeds the available number of seats. These charter schools introduces choice for the consumer – children who would otherwise attend the nearest district public school.

As the Detroit Big Three experienced when international automakers created superior vehicles, public district schools see the growth of charter schools as a significant threat. Political Science Professor Steven Teles explains that most powerful interest groups form around the goal of protecting what they already have. Society has “durable bias against undoing things” because people who want change tend to be less mobilized whereas the groups who are at risk of losing benefits are already formed.

We see this in many teacher unions.  Seniority-favoritism rules around compensation and tenure hurt the early careers of newer, younger teachers of a generation more inspired to create change and accept merit-based accountability. However, there is a looming demographic problem approaching teacher unions.  Educator Mike Stryer explains that if the union’s older base does not reshape its policies, then they will become a disappearing force especially when 30% of U.S. public school teachers are expected to retire in the next 5 years. So in order for teacher unions to remain successful in the long run, they must be wise enough not to stretch for too much power that they put their own employers – public district schools – at a significant disadvantage in the market.  Or the union can aim to restore monopoly power for their employers, and they can do this by convincing the public that charter schools are a bad thing.

So What’s Next, Northwestern?

College football players – as the members putting their futures at the most risk while being the only unpaid participants –  should be granted the right to unionize. But like with all things, let’s hope that the union has forward-thinking leadership and healthy governance structures that are thoughtful about creating a system that with the right balance of short and long term goals. Players should be fairly compensated, but colleges themselves are business that need to think about profitability. It has been reported that most colleges are running their athletics programs at a net loss in a sports market where financial benefits trickle to a small minority. Unions are part of a larger system, and a healthy union-employer partnership will be one where the union’s self-interest does not impede colleges’ abilities to provide education profitably; otherwise, they may see a fate similar to Detroit.

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

- Upton Sinclair

By Jonathan and Jenny

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Jonathan Yu is the author of From Zero to Sixty on Hedge Funds and Private Equity. He can be reached at jonathan [at] jonathanyu.net.

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Related Reading: Success to the Successful | Addiction | The Birth and Life of Charter Schools

 

 

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