Wednesday, November 19, 2008

Union Flashback: Big Labor's Long Decline

From the Wall Street Journal (9/27/2007):

"The problem with unions is not all that dissimilar to that posed by entrenched management: Once they win comfortable contracts, they often become impediments to the kind of innovation and flexibility essential to success in today's economy. So in the name of "job security," they undermine a company's -- or a nation's -- competitiveness. The result, over time, is less job security for everyone, especially the union workforce. There's no better example of this than GM, where the UAW now represents about 74,000 hourly workers, compared to 246,000 in 1994. Some security."

This is basic ECON 101:

For a time, unionized workers can enjoy higher-than-market compensation, and job security. To the extent that union labor costs are higher and therefore the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan, see CD post on Honda's new Indiana plant) and away from unionized firms. As a result, the growth of productivity and employment, as well as market share, will tend to lag in the unionized sector (from 90% market share in the 1960s for the Big 3, to 47% today).

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations (Honda, Toyota). Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability (Big Three) are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run (172,000 UAW jobs lost at GM alone). The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.

Originally posted on September 29, 2007.


At 11/19/2008 9:28 AM, Anonymous Anonymous said...

That only applies to unions in private sector, unions feeding at the public trough are doing just fine as they bankrupt the state.

At 11/19/2008 9:39 AM, Blogger David Damore said...

The date is mistyped.

"From "The UAW's Awakening" in the Wall Street Journal (9/27/2009): "

It appears that the correct one is at the bottom of the post.


At 11/19/2008 9:57 AM, Blogger Mark J. Perry said...

Thanks David, it's fixed now.

At 11/19/2008 11:09 AM, Anonymous Anonymous said...


You make a good case, however, to be completely balanced, shouldn't one also consider productivity gains and automation as factors in manufacturing workforce reductions.

Don't declining workforce numbers at GM reflect the general trend in the manufacturing sector where employment peaked in 1979? The tremendous gains in productivity and automation since that time mean that fewer workers are required to generate significantly greater output.

You made this very point in March, 2008.

Additionally, it is difficult to find any company that has a track record to match the capital destruction of GM over the course of the last 30 years. The UAW hasn't helped but GM is legend for mismanagement.

At 11/19/2008 9:13 PM, Blogger destilando cafe said...

I wonder when the "discipline of the market" will show up in teachers' wages. For example, Florida has a high demand for teachers and pays low wages. the opposite is true in NEA-country, Michigan, or AFT-land--New York.

At 11/19/2008 9:32 PM, Anonymous Anonymous said...

destilando cafe, so what should teachers get in Fla.? Should they receive the same amount as NY teachers and if they do should they pay the same for their houses, their taxes, etc.

As someone who lived up north I know there is a major difference in cost of living and believe the comparison is not a fair one by any definition.


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