RateWatch #405 – Labor Unions

May 1, 2004 by Dick Lepre

What's Happening

Personal Income and Personal Spending were both up 0.4% in March. Bush and Cheney's talk yesterday will become the second most important Q&A of the week after Warren Buffet and Charlie Munger talk at the Berkshire Hathaway annual meeting this weekend. No one person has the grasp of business that Buffet has. He is the very definition of "old school." If you want as honest a look at the economy as is available, listen to him. BTW, for those of you equity heavy, Buffet says that equities are overpriced and is sitting on $31 billion in cash.

The GDP data released Thursday sent no clear signal as to where the economy is going. The headline number - +4.2% GDP growth - is higher than the previous quarter but below expectation. The Chain Weighted Deflator (a measure of inflation which weighs each component
according to its contribution to GDP) was +2.5%.  This is indicative of inflation which, while hardly serious, always merits the attention of the Fed.  The components of GDP are "all over the place."  Consumer Spending was +3.8%.  Business Investment was +7.2%.  Commercial Construction spending was -7.0%.

Overall this report will likely encourage the Feds to keep rates where they are at next week's FOMC meeting because getting the economy growing is more important than mild inflation especially when that inflation is more apparent than real because it is offset by productivity gains lowering, for example, unit labor costs. 

The effect on interest rates will be a short-term benefit followed by another annoyingly long period of speculation as to when the Fed will hike.

Labor Unions

One can make an academic case that labor unions started in the U.S. as craftsman's guilds going back to the time of the American Revolution.  The most notable person in the history of the labor union movement is probably Samuel Gompers who started the American Federation of Labor
in 1886.  At this time in history individuals had not yet adapted to the effects of "the Industrial Age" and workers labored under unsafe conditions for long hours and received low pay, little in the way of benefits and little of no legal protection.

Upton Sinclair's 1906 novel, The Jungle, (available on-line at
wrought social change in as much as it precipitated government investigation of the meat-packing industry. It also heightened public awareness that some workers were treated poorly.

Another, somewhat lesser know force from this period was the photography of Lewis Hine see:
Hine was a brilliant photographer whose work is collected as art rather than social commentary and his pictures of young children working in places such as mines are nearly incomprehensible to the contemporary mind.

In the 1920's labor union membership had been eroded by a post World War I depression (this was before "The Great Depression") which seriously cut both wages and union membership.  Also, the Bolshevik revolution in Russia and the perceptions of "radical unionism" in the form
of the IWW (International Workers of the World or Wobblies - the "I dreamed I Saw Joe Hill Last Night" people) provided grist for anti-union sentiment.

In 1935 John L. Lewis created the CIO (Congress of Industrial Organizations).  This was a different "marketing concept."  Whereas, the AFL organized people by skill, the CIO sought to vertically organize entire industries.  Eventually, in 1955 the two groups merged into the AFL-CIO.  The irony is that just as the two labor groups stopped fighting with one another their power started to diminish.

The Kennedys Hit the Small Screen

When I was a young lad, my first awareness of what labor unions were resulted from watching something on TV called the Senate Labor Rackets Committee AKA the McClellan Committee.
This was a Senate committee chaired by Senator John L. McClellan of Arkansas.  These were riveting events.  They were like the Olympics.  On one side were the Kennedy brothers (John and Robert.)  On the other side were folks like Jimmy Hoffa , Sam Giancana and an interesting dude
named Johnny Dioguardi (AKA Johnny Dio) who was the master of labor racketeering.

Without getting sidetracked into stories about such interesting criminal types my point is that I developed a really bad and one-sided perception of labor unions. 

The McClellan Committee showed that some unions had stolen union funds, made "sweetheart deals" with employers (in exchange for kickbacks) and, in general, acted against the best interests
of the membership.

Jimmy Hoffa and the Teamsters Union came into the crosshairs of the federal government.  The Teamsters were "run out" of the AFL-CIO and in 1988 the Justice Department filed a civil RICO
lawsuit against the Teamsters in U.S. District Court in Manhattan.  The lawsuit was filed by a U.S. Attorney for the Southern District of New York named Rudolph Giuliani.

The Justice Department had hammered the Teamsters union into a series of plea bargains and a consent order that, in essence, circumvented a host of constitutional and civil rights issues.
From the point-of-view of the justice department, it had imposed democracy on the Teamsters.

The Teamsters have changed a great deal since then. It has gone through a series of contentious elections but this is now a union that has the benefit of its members as its primary concern.

Victims of Success

In the past several decades unions have, in a sense, been victims of their own success.  Having raised the wages of workers so successfully, much union-made stuff is so expensive that manufacturing has been offshored.

It goes further than that.  On Friday, while I was driving to work I heard an ad which (I try not to take notes while driving) I think was from the Communications Workers of America asking for public support for a contract with SBC (the phone company) which protected their jobs from off-shoring.

This press release by CWA
expresses their concerns about off-shoring and outsourcing to non-union labor which are the core of a potential strike against SBC.

Some interesting things have resulted:  union membership is now being concentrated on non-exportable jobs - government workers are an excellent example.  Non-union companies are being equated with "low cost" and "low price."  The most glaring example is Wal-Mart.

Wal-Mart is a gigantically successful retailer.  Part of its success is in its ability to defeat attempts
to unionize.  It would be difficult to construct a more successful business model than Wal-Mart:
it has enormous leverage with suppliers pressuring them to drive their costs down, it keeps wages down, has enormous stores and provided things at low prices.

In short, Wal-Mart is successful because the perception is that it puts the retail customer above the employees and suppliers.  It provides: one-stop shopping, selection, easy returns and low prices.

Because of the size of its success and the fact that it has served to keep wages down and threaten unionized competition Wal-Mart has become a gigantic target. Here in California we had a prolonged grocery strike which, on the surface, was about employees sharing the costs of medical coverage but may really have been about "how the heck are either of us (employers and employees) going to survive if we have to compete with Wal-Mart?"

Other Potential Drawbacks of Unions

Union bashers make a case that unions have some drawbacks: Unions have a kinship to civil service.  The value of merit is diminished. Union members cannot advance based so much on their merit but must progress according to the union's contract with the employer.  Higher productivity does not merit higher pay.  Employees might even be peer-pressured into not pushing the envelope. I think that this is one of those inevitable consequences of both civil service and labor unions.  They may take the edge off productivity but it would be hard to make a case that the extent to which this has occurred is fatal. The intent is not "goldbricking" it is to prevent unjust or capricious firing.

The Future of Unions

Some employees, at present, may find themselves in a dilemma (the SBC situation is a good example).  Let their jobs be lost to foreign competition, go to work for non-union employers
and, presumably, trade job security for a lower wage or, somehow, keep the status quo of strong union wages.

Unions and management are in a struggle for survival and they are, more clearly than ever on the same side (or should be). 

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