Unions: Good or Bad?

It would be difficult to argue that labor unions haven't done a lot of good for American workers. But have they got a little too much power now? They may be interfering with companies' abilities to compete -- and perhaps investors should consider unions when evaluating companies.

By Selena Maranjian (TMF Selena) October 30, 2003 I've long supported unions. I've even belonged to two -- when I was a high school teacher and when I was a university administrative worker. (For the record, the Harvard Union of Clerical and Technical Workers had some great songs.) But in recent years, I've come to doubt my pro-union convictions. Permit me to share some of my thoughts and then to solicit your thoughts. I suspect that many who read my words are much more informed about and experienced with unions than I am.

Why unions are good In much of industrial America, workers toiled under very unsafe conditions, earning extremely low pay and enjoying little to no legal protection. Unions were successful in bringing about many improvements for such workers, such as more reasonable working hours. They have generally served workers well by helping them avoid being exploited by employers. Even in these days, unions have a strong impact. According to the Bureau of Labor Statistics, union members in 1999 had median weekly earnings of $672 (that's $34,944 per year) while non-union workers had median weekly earnings of only $516 ($26,832) (source).

Why unions are problematic Much as I'd rather not accept it, while unions have done a lot of good and have helped workers avoid exploitation, they also seem to have helped workers exploit employers. Perhaps it has been a gradual shift over time, with unions slowly accumulating more and more power. (Perhaps not -- again, I welcome your thoughts.)

Unions can have the power to impede a company's ability to compete and thrive. A firm might be in desperate trouble, yet its unions may be unwilling to bend or compromise in order to help the company survive. Many employers find themselves left very inflexible when they have union contracts to abide by.

Anti-competitiveness. The Socialstudieshelp.com website suggests that, "unions… are victims of their own success. Unions raised their wages substantially above the wages paid to nonunion workers. Therefore, many union-made products have become so expensive that sales were lost to less expensive foreign competitors and nonunion producers."

A decline in the value of merit. In many union settings, workers can't advance much or at all on their merits, but must generally progress within the limits defined by union contracts. Employers may have trouble weeding out ineffective employees if they belong to unions. In theory, at least, unionized workers might become so comfortable and protected that they lose the incentive to work hard for their employer. And outstanding employees might lose their get-up-and-go if there's no incentive to excel -- or worse, if they're pressured by the union to not go the extra mile. Here's a webpage detailing some other union drawbacks.

Is there a problem? So there's both good and bad associated with unions. I suspect that most businesses, and even many or most investors in said businesses, would prefer that the businesses be union-free. But that's easier said than done.

Is ownership an answer? One strategy for companies to avoid unions taking hold on their premises might be to ensure that as many of their workers as possible are as satisfied as possible. That's simple and makes sense, but it can become mighty difficult to maintain as a company grows huge. Another option is to convert employees into owners -- via stock ownership or profit-sharing, for example. If workers have a real stake in a firm's bottom line, they may be more sympathetic to management's point of view and more eager to work extra hard to help the firm succeed.

That's not a perfect solution, though. Starbucks (NYSE: SBUX), for example, is known for awarding stock options. Yet some of its workers in the U.S. and Canada have organized into unions, while others would like to.

Consider also Southwest Airlines (NYSE: LUV), which has long made employees part-owners via profit-sharing and stock options. It hasn't escaped having unions in its midst. Yet, as this Foundation for Enterprise Development case study notes, "A few years ago the pilots' union at Southwest struck an extraordinary deal with the airline to freeze wage increases for 10 years in exchange for an increased proportional allocation of stock options. The flight attendants' union has since also signed a similar agreement that is unprecedented in the industry." And Southwest has continued to thrive in its notoriously tough industry.

American Airlines, whose parent company is AMR (NYSE: AMR), also decided to issue stock options to its employees, making the announcement in April -- and just a week or so ago it reported a long-elusive (though tiny) profit. Are the two items related? Perhaps, at least to some degree. Though it's worth pointing out that stock options aren't necessarily always attractive. If they're for stock of a shaky company in a wobbly industry, they may not be worth much at all. (Bill Mann noted earlier this year why investors might want to walk away from American Airlines.)

The healthcare crisis If ownership isn't the best answer, perhaps healthcare coverage might be. Along with compensation issues, healthcare is a major factor in the recent strike of grocery workers in California. The unions don't want to lose ground on the healthcare package workers currently receive. The grocery chains are crying that they're being pinched as they fight the threat of Wal-Mart (NYSE: WMT) -- yet some have been recording increases in sales and earnings lately. Kroger (NYSE: KR), for example, posted a 3% increase in sales and a 16% increase in earnings between fiscal 2001 and 2002.

What's really going on? I suspect that both sides fear a slippery slope: Workers fear that if they give in a bit on healthcare, they'll eventually lose it all. (And with healthcare costs skyrocketing lately, that's a valid concern.) Employers fear that they're already on a slippery slope as they fight the encroaching behemoth that is Wal-Mart.

The Wal-Mart situation Wal-Mart itself is interesting, when you consider unionization. Thus far, in its not-that-short history, it has escaped having most of its workers belong to unions. But a passionate fight is being waged right now, as workers struggle to establish a union.

This raises interesting questions for us investors: Should we root for the union, as it might lead to more livable wages for employees and might keep more of Wal-Mart's million-plus employees enjoying healthcare benefits? Or should we root for Wal-Mart, figuring that a union will almost certainly put pressure on profits and might threaten the company's ability to sustain its track record of formidable global growth?

I'd like to tell you what I think of the Wal-Mart situation, but I can't. I'm torn. I see both sides of the issue. I wouldn't want to see Wal-Mart unduly restricted by union stipulations. I recognize that although it's enormous, its net profit margins aren't that hefty, at around 4%. That doesn't leave lots of room for adding expenses (though of course there is some room). But at the same time, I wouldn't want employees to be taken advantage of simply because Wal-Mart is big enough to do so. I admire generous companies, ones that treat their workers well. I'd want Wal-Mart to be, as many folks would argue it currently is, fair or even generous to workers. I suppose what I'd like to see is a more perfect solution than a traditional union or successful union-busting.

Questions that remain So after this brief foray into union considerations, I'm left with more questions than answers. Once more, I invite your thoughts. Please share them on our discussion board for this column -- or pop in to see what others are saying. (We're offering a painless free trial of our boards right now.) I hope to revisit this topic soon, to share some of the most compelling responses of yours that I read. Some food for thought:

If unions are no longer so critical, should they disappear, and if so, how? They enjoy many protections by law. By what process might we become a union-free nation?

If unions are indeed still vital, how worried should we be that less than 15% of our workforce belongs to unions, and that this figure has been dropping?

How might unions and employers/managements better coexist, without one side exploiting the other?

How should investors view companies that have unionized workers? Fool coverage of unions If you're interested in other Fool articles that have touched on unions, look no further. Whitney Tilson recently explained how JetBlue Airways (Nasdaq: JBLU) is "JetBlue is ALPA's (the militant and powerful Air Line Pilots Association) worst nightmare, and they will do anything to unionize JetBlue." And earlier this year, I questioned whether Wal-Mart (NYSE: WMT) was exploiting employees and received many responses from readers.

Now however, the whole workforce can walk off and prevent the owner from hiring replacement workers to run his operation. By striking they are interfering with his right to use his property as he wills. They are stealing from him.

---I was with you up until that second to last line. You want to just ban strikes? If it isn't okay for strikes to happen, then it isn't okay for people to walk off their jobs--you want to force people to work, regardless of their contract or (in most cases) lack thereof!

And workers striking (thus stealing time and moiney from the employer) are interfering with the owners control of his own property. if they want to leave work, great. Walk out and don't come back. But don't try to blackmail the owner into giving increased wages etc by trying to destroy his business.

---The owner doesn't have to agree with them. Again, you want to compel the workers to work. If the workers are contracted and violating that contract, the owner should sue. Unions are fat and happy. But preventing strikes is saying that no matter what workers can't quit en masse, which is pretty much their best negotiating tool.

If I own the company I have the only say in who works there. If I treat my employees well I'll have great employees (because the good ones will stay and the bad ones will get fired). If I treat my employees poorly I'll have poor employees (because the good ones will leave and I'll get stuck with the bad ones or none at all). No union or gov intervention is required. Poor management brings its own punishment and that punishment should not be having a group of people trying to destroy your business

---Fine. Don't negotiate with unions, don't give them what they want. Calling unions a group of people 'trying to destroy your business' is going overboard. Unions don't try to 'destroy businesses,' though they often DO exactly that. You should recognize that you're just slinging vitriol, and it's obvious that poor management does NOT bring its own punishment in the companies most likely to have strong unions. Anyone who sees the golden parachutes that popped open during the last crash has got to know better. And the unions generally are trying to get better pay and treatment for their workers, which is a management decision that could be a good one or not.

Say What? Severence pay is totally bogus as is a two week notice. Severence pay in almost all cases is a result of union or gov blackmail. Two weeks notice has no contractual or legal basis. If I choose to leave, I just leave, How can anyone force me to work?

---You act like two week notice isn't standard, but guess what, you need references to get future jobs! Employees don't get to walk off jobs unless they don't want to work in the future, contrary to your imaginative scenario. And what if everyone else wants to leave, too? You want to prevent them from doing so at the same time. Guess those workers who can just walk off now can't, until they train their replacements, so that they don't 'deprive the owner of his property.'

...BTW anti-free-market legislarion should never happen under any circumstances. The market itself will weed out the poor managers

---Agreed. So we should stop backing up poor managers with the strikebreaking powers of the fed, too.

Every union that strikes or requires all employees to join, [is a criminal enterprise] yes.

---I agree with the latter but not the former, for reasons given above.

Calling an apple an apple is not judging

---I'll have to remember that. Meanwhile, I have a mote to pick out of my eye. Check out the plank in yours.

Actually, for those who are die hard NEA members, I'd vote for execution. They are destroying our country and killing our children by indoctrinating them with liberal ideas such as homosexuality and abortion rights. Any member of the NEA who pays dues without protest should be permanently barred from any contact with children. Any exposure of children to homosexual behavior is child abuse

---Okay...so let's see, if you're exercising your right of free association and union leaders take that organization in some ways you don't personally like but you think negotiating collectively benefits you enough to stay in the union regardless of the national organization's wacko viewpoint--you should be SHOT. Boy, I dislike the NEA, and I wouldn't pay dues to any union, but you're just completely overboard.

Christ thought the entire bible was important, after all He wrote the whole thing (By inspiring men to write down what he revealed to them).

---Nowhere do I disagree with this, and nowhere does it lessen the impact of my statement that Mark 12:30-31 is more important than your twisting of other Scripture.

Love thy neighbor as thyself. Note that it doesn't say "gang up on your neighbor with a bunch of other thugs and deprive him of the ability to make a living with his own property". Nor does it say "threaten to destroy your neighbor unless he pays you better".

---You object to this, and yet seemingly you see no way that unions could possibly prevent this from occuring on the part of the MANAGEMENT, that management has done in the past exactly this, what you complain of unions doing today, with the building of 'company towns' and strikebreakers. Unions were literally the only way workers could protect themselves from abuse WITHOUT government intervention. And in my thinking, still are, with most government intervention on the side of business today (both in the U.S. and out).

Union LAWS are a problem. Government intervention is inevitably wrong. But collective action is not. I fail to see the difference between a walkout by one person and a walkout by many, and you seem to think strikes are clear cases, situations where unions are always at fault.

The NEA speaks agains the bible. Most unions preach forced socialism or forced communism which are both anti-biblical concepts. But this is beside the point.

---No, this is the point you made, that they go against the Bible. The Bible can be construed in lots of ways, as you seem to think, since you manage to read Scripture in both the correct way (literally, as Christ viewed it and stated its meaning) and in your imaginary way (labor unions are EVIL). To some, communism is the ULTIMATE in Biblical. Not to ME, mind you, but there are many ways of reading 'Do Unto Others.'

The point I am making is that the very existence of a labor union is anti-biblical. There is no support for forced collective bargaining in the bible and where labor is mentioned it is always a contract between the owner and the worker.

---There's no support for flying planes or piloting submarines or universal suffrage or manumission either. Just because the Bible doesn't MENTION it doesn't mean it is AGAINST it.

Exactly, as collective bargaining has no standing in scripture.

---Exactly, just as the Christian soldier has no standing in scripture, so I expect to see your post wanting to force Mr. Boykin out any second now.

But, PLEASE, don't try to make this claim again: Matthew 20:10 But when the first came, they supposed that they should have received more; and they likewise received every man a penny. 11 And when they had received it, they murmured against the goodman of the house, 12 Saying, These last have wrought but one hour, and thou hast made them equal unto us, which have borne the burden and heat of the day. 13 But he answered one of them, and said, Friend, I do thee no wrong: didst not thou agree with me for a penny? 14 Take that thine is, and go thy way: I will give unto this last, even as unto thee. 15 Is it not lawful for me to do what I will with mine own? Is thine eye evil, because I am good?

That's not about labor unions, no matter what you're trying to twist it to say. It's about those coming late to the kingdom of God being shunned by those who have come early, not collective bargaining! Stop trying to blasphemously bend God's words to your earthly purposes!

It's about both. If you would read the whole bible you'll find that extorting someone out of their property is not allowed

---Either the Bible is literal or not. Christ never said a thing about unions, here or elsewhere in the Bible, and you are reading to your bias in claiming that any mention of extortion means unions are evil. Unions only 'extort' what owners and management are willing to give. If they break the law, and REALLY extort, they can be charged with a crime.

So if everyone in town decided not to buy from a particular store collectively, that would be the same thing, in that they deprive a business of something they would otherwise have.

No. But if they blocked his doors and didn't let anyone else buy from there it would be theft. You are not forced to shop anywhere just like you are not forced to work anywhere. But you never have the right to stop someone else from shopping or working anywhere. Unions stop people from working unless they join the union. They stop people from working during strikes. They block the owners property and prevent him from doing business. All of these actions are different from just deciding not to shop somewhere

---Unions are legally enjoined from stopping people from working in most states (we're in agreement that closed shops are wrong) and legally enjoined from stopping people from buying or working in establishments that try to break strikes. Laws against such actions are on the books and though unions might chafe at them, they must observe them or get sued/charged.

Or better yet, if I decide I'm not going to work for an employer any more because I don't think he's paying me or treating me well, I am personally stealing from him.

If you just leave and leave him alone it is not theft. If you stick around and try to block his business or stop others from working for him it is theft

---Not if you are only exercising your right to free speech. Blocking entrances is wrong, and any union that does it should be sued/charged.

I never said anything about imposing a law. In fact I am for repealing all labor laws now on the books, federal, state and local. Gov has no business whatsoever in the employer/employee relationship. However, laws against criminal activity (such as blocking the entrance to a factory, or hiring thugs to beat the workers) must be rigorously enforced. Almost all these labor laws are anti-business and pro-union.

---If your objective is repealing laws, then we agree. I agree that laws on the books, however, must be enforced. We could start with the hour and wage laws, which are regularly broken. I also agree with the notion we should repeal ALL the laws on the subject.

But your central tenet is to say owners should not be forced to do with their property what unions would have them do. They aren't, just as people aren't forced to show their drivers' license to fly on a plane. They make that choice. Unions are free people making their own choice to collectively act and use their own 'property' in the best way they see fit. You want to intervene for the property rights of one group and not for others. Fine. Just expect it to get that group treated worse, for when the other eventually gets into power they will treat it poorly in retribution. You perpetuate a cycle of unfairness in siding reflexively against workers.

Your response to solving the issue you feel created by unionization is yet unknown to me--what would you do to stop the 'problem?' Ban unions outright? Or are there ANY such things as good unions?

The only immovable assets that would prevent efficiency improvements are major presses or other large capital equipment. Most of those are not at the assembly plant, therefore the immovable assets are not a hinderance to the efficiency of assembly. Even in a brand new assembly plant, when UAW labor is used, the efficiency is lower than the non union transplants.

---In the U.S., maybe. You still haven't managed to address what I said about Japan or Korea. Not that you've managed to supply any more than assertions about union labor vs. non-union in similar assembly plants.

"I'm not saying unions cause no problems for productivity, just that measuring productivity on the basis you prescribe isn't entirely accurate."

You might not like it, but that is the accepted method of measuring productivity in the automotive industry.

---I might not like it? No, I might not agree with your broad assertions of truth as opposed to documentation thereof. Show me the numbers. I don't doubt that unions are harder to police, but I would be surprised to see you compare much in the way of union vs. non-union plants in the same company and finding big differences.

"Why would they let the company sacrifice their members for efficiency when their intention is to represent the workers? If the company thinks it can do better, it should. That's what the free market is about. To say unions are at fault for trying to maximize their income for their property (their labor) is to say only factory owners should get reward for their risk-taking."

Sure, the UAW would rather have a garunteed number of jobs at a company that doesn't exist. That is what they don't realize, the UAW officials always state that the company is lying, but the reality is that the innefficient companies that produce a more costly product will be eliminated from the market.

---So we agree here, then, that unions are just trying to get what they want. That they aren't inherently inefficient. What's inefficient is agreeing with their demands when it'l break a company to do so.

"Not at all. That UAW can't 'infiltrate' new companies isn't necessarily because all unions are bad. UAW can't 'infiltrate' China, either, and there, unions would do much good to alleviate poor worker treatment."

The UAW can't get into the transplants because the workers realize that they already get treated well and that they are well compensated. The only advantage would be to the UAW officials in a growth of their ability to gather dues. The workers realize that they wouldn't see a benefit at all, and would most likely end up in an antogonistic relationship with management that would harm them in the long run.

---No, there is government intervention there preventing it in lots of places, and you admit it below.

With regards to China, the workers already have representation that sets policies regarding employer behavior. It is called the government. Any thing the government sees fit to mandate, will be mandated. You may consider their working conditions deplorable, but you are comparing them to the US. By their own standards the working conditions are a step up in their standard of living. Would you rather they live in a mud hut with no food, or work for $1 an hour? I would prefer to leave that choice to them. Keep in mind that their neighbor is working for $0.50 an hour.

---Okay, so you think that government should set working conditions, and anything they do is okay. You are an absolutely wonderful conservative. And let me point out that you think that unions are without value, and I should judge China in from THEIR cultural perspective, yet your bias against unions is from YOUR cultural perspective. That you defend China's labor practices is frankly unconscionable, and that you act like China has any such thing as worker representation is shameful. I cannot disagree more.

"I don't think it would, because if I worked a line all day, I'd want to be narcotized, too. But I have no idea what your point is. That workers for the UAW are druggies, so they shouldn't be members of unions?"

My point is that they are able to engage in this behavior because management has no ability to eradicate the labor force from the "slugs". The UAW protects them regardless of their unacceptable behavior. Another example of a hit to productivity.

---You mentioned this was during their lunch break. Explain how productivity was affected during an hour they weren't working? However, again, you're quibbling over something that unions SHOULD be doing to protect their workers, since they're negotiating to protect current members (not future ones). Unions (which ARE productive for their members) can protect workers (who could be unproductive from a management perspective in all sorts of ways) because unproductive management signs unproductive contracts.

"Oops, maybe I was supposed to conclude that we should make those damned union slackers pay somehow? Maybe force them to work for the benefit of the owner without compensation?"

What the heck are you trying to say here? If you reread the example, you will see that the expectation is that the union member gets to get paid for doing nothing. That is the theft referenced. They sit on their hands, then start again at OT pay. Another hit to productivity. This exact issue is what GM was trying to change a few years ago and it cost them $5 Billion.

---I will say exactly what I am trying to point out about your argument, slowly. And I'll use small words, just for you.
You say that it is wrong that workers get to do what they're doing. Yet you float no ideas as to what you'd have them do. This forces me to figure out what you'd do to solve the problem you see. My guess is that you'd have them work at the same pay rate and for the additional two hours, or not pay them because the line is down. You are saying that workers should be forced to take a hit because the line doesn't work, instead of the owner. Why is this any more right than the owner eating the cost? I don't disagree the situation's lousy, but GM negotiated the contract and that makes THEM stupid and inefficient. Not the union.

The rest of your post is basically trashing Management of a company. I agree, bad management causes as many problems as the UAW. This was a discussion about unions, not management, so I replied accordingly.

---Yes, but you seem to think that the UAW is inherently more EVIL than poor management...as you go on to state below. I'm not trashing management to say that management is the problem, not the unions, who are rationally pursuing their goal of making the most money for the least work. Management is obviously not pursuing its goal of maximizing shareholder value vigorously enough, or we would have no complaints about unions.

The bottom line is that the contracts are signed after the company is held hostage. GM attempted to root out a lot of problems with the UAW contract and it ended up costing the $5B at the time and a few more billion, until their recent recovery. The bottom line is that in order to keep from losing billions the auto companies give in to this. Then they lose market share to the competition, they lose money by being inefficient and end up in jeopardy of going out of business.

---That workers don't want to do the work for less doesn't make them evil, no matter your portrayal of them as 'holding the company hostage.' It just makes them rational actors. The market takes care of inefficient companies, and the managers should make their decision rationally. If they didn't think the contract was okay, they shouldn't have signed it.

With regards to risk. The individual employee has taken no risk by working in the plant. That labor is only as efficient as the thinkers have allowed them to be. The ton of steel today produced by someone's labor would not be possible without the people that invented the production process. Instead, that labor is only worth the few pounds of steel that a blacksmith could have produced in midevil times! The owner takes all the risk by investing in the property and equipment.

---Uh huh. So if you work in a plant straight out of high school instead of college, you take no risk? If you work a line until you're fifty, you take no risk? C'mon. Everyone gambles something every day. That's how the market works. From a money perspective, owners have more to lose, but workers have the primary property they own to lose, too. Risk is relative, and you see it as infinitesimal at best on the part of the worker, which is horse crap. To a person who works 8 hours, that's a day's labor. To a person who's worked 20 years on the line, that's a lifetime's work.

Just calling labor valueless doesn't mean that the owner or the laborer doesn't place value on it.

No one is entitled to a job, they must exchange their time in as efficient a way as possible to increase their time's worth. Instead, the union tries to increase the value of the worker's time without allowing for increases in their productivity. In other words, the goal of the union is to try to get as much money for the least efficient work force as is possible. This is not a positive in a free market and will eventually cause the demise of the business as a whole.

---I think you mistake the union goals--they want to get as much money as possible for the least WORK. Not least efficient. That may be the least efficient, but not always. If you want to claim that this is not a positive in the labor market, imagine a work force where all the workers were randomly irrational actors who did NOT want the best for themselves. How would companies attract workers at all? They wouldn't know how!

And I never said anyone WAS entitled to a job. Thanks for the econ lecture, Grampa Smith. Unions are just a tangible expression of worker greed and discontent that you can point your finger at, instead of grumbling at management stupidity for letting workplace discontent get out of hand in the first place. If management had fired grumblers and fixed safety issues and fairly paid and hired workers in the first place, the unions wouldn't be any problem today.

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