Thursday, July 21, 2011

Unions Thrive in Monopolistic Conditions

The percentage of employees represented by unions is far greater in the public sector (40%) today than in the private sector (8%). That represents an enormous change from fifty years ago. What happened?

The answer is straightforward. The government is a monopoly and has no competition. It gets its funds from taxation.

Meanwhile, competition in the private sector has intensified these past fifty years. This has happened largely as a result of globalization's effects.

To get a sneak peek into what happened to private industry as well as what may lie ahead for the public sector, let's look at the automotive industry's recent history in America.

Approximately 50 years ago, what were then called the "Big Three" companies of General Motors, Ford and Chrysler dominated U.S. automobile sales. GM by itself sold more than 50% of the cars in the U.S., and the three companies combined sold ~75% or more.

The United Auto Workers (UAW) union represented bargaining unit employees at all three companies. Thus, the industry had three dominant companies and one dominant union. All headquartered in Detroit. One big monopolistic family, if you will.

Today the monopoly is over for the three companies, the city of Detroit, and for the UAW union, too. These three companies are now called the "Detroit Three" in A Fall Classic: The Auto Workers vs. Ford. The simple changing of the one word preceding 'Three' from 'Big' to 'Detroit' says a lot and is a story worth reviewing.

The above referenced article analyzes the potential outcomes of negotiations this fall between the UAW and the three Detroit based auto companies. It concludes that there will likely be no strike upon contract expiration in September. But that's not really important, at least to the story I want to tell.

The article points out that the union now owns a part of of both GM and Chrysler, thanks to recent federal government bailouts, and the writer raises questions about whether GM and Chrysler will, as a result of those ownership stakes, receive favorable treatment by the UAW over Ford in the upcoming bargaining talks. Of course, the union holds no ownership position in Ford (other than representing members who have lots of jobs).

While the fall negotiations may be of some slight passing interest to Toyota, Nissan, Honda, VW, Hyundai and other competitors, my guess is that these non-Detroit, non-union, non-U.S. companies really don't care all that much about what happens in Detroit this fall. The old monopolists are no longer running the competitive show all by themselves, and that includes the UAW, too. They haven't been successful organizing employees of the new players. Not even once.

Accordingly, there is no longer a monopoly including GM, Chrysler, Ford and the UAW union, and the real question for them now is how many will survive over the longer term. Competition nails those companies and organizations, perhaps including unions, that don't adapt to the times at a continuing and rapid pace. That's simply the free "consumer choice" market at work.

But what about the UAW? Well, it's no longer a part of an industry monopoly. The non-Detroit players are all non-union. And since a union needs a monopoly so it can thrive, the union has big competitive problems of its own.

In simple terms, a union's basic function is to "tax" its members in the form of dues. Those dues begin as employee wages paid by employers. To repeat, member dues are the source of a union's funds, and the source of member dues are the wages paid by employers. These wages are made possible by the sales and profits of the company.

Thus, it all starts with a sale, and monopolies have no problem making sales or charging high prices. For non-monopolies, however, there's competition, and that's an entirely different story.

To repeat, union dues are similar to taxes. Without dues the unions have no money. Unions thrive when they are able to negotiate with employer monopolies. (HINT: The government is a monopoly.)

Since redistribution first requires something to distribute, that something means profits in the private sector and taxation in the public domain. Let's stay with the auto industry for now.

Let's not forget the co-conspiratorial role played by the auto companies in the automotive debacle that played out over the past 50 years. The Big Three acted like a permanent monopoly in complete alignment with the UAW in the 1960s and beyond. It's rather obvious that the union and the companies treated labor and productivity as non-competitive factors in that each company paid essentially the same wages and benefits and used the same work rules as well. The "pattern" bargaining simply meant that the UAW negotiated with a target company and then the other two companies adopted the same agreement negotiated by the target company and the UAW. Everybody was paid the same, and nobody had to work too hard to make a sale or get paid for whatever work was done and whatever quality levels were achieved. A nice cozy monopoly when times were good, and there was "plenty" to share. And when negotiations took place every few years, even more sharing of the plenty took place for everyone.

It lasted until Toyota, Nissan, Honda, VW, Hyundai and others entered the picture. Then competition came to the U.S. and to the automotive industry. And the competition didn't bring any unions with them upon arrival. Just competitive cars and such and a thirst for growth.

So the Big Three now is the Detroit Three many years later.

In simple terms, the entire historical Big Three arrangement was predicated on the fact that there would always be plenty to share among the monopolistic industry and its union partners. Therefore, the employees would do well, too. As long as the monopoly lasted.

But upon arrival the foreign transplants threw sand in the monopoly's gears. Domestic market shares and profitability took a nosedive, and the monopolistic arrangement didn't react to the competition. Not for a long time.

Unions don't far well when competition is present. And people who belong to unions are not incentivized to excel. Everybody seeks the lowest common denominator, and a dumbing down process takes place due to the absence of competition.

That's because pay is equal for all in a particular job category, or if unequal, pay differentials are based on seniority and not individual or small group performance. Imagine paying everybody the same thing on a professional sports team or in a PGA tournament, regardless of who won or what the score was. But that's the effect of union monopolies. And all other monopolies, too, for that matter.

We'll get to the public sector soon.

Thanks. Bob.

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