Sunday, April 09, 2006

The Ugly Side of Organized Labor

The Wall Street Journal's editorial website, Opinion Journal, ran a story yesterday, titled "GM, France and Albany," comparing the problems organized labor can wreak upon companies, national economies and governments.

While I admit that labor unions have both a right to exist and a purpose for continued existence, organized labor can cause a multitude of problems for everyone around them when they overstep their boundaries and use their power to fulfill ever higher demands, to the detriment of employers and surrounding economies.

The Opinion Journal, while stating that previous columns have fallen on the side of protecting collective bargaining, argues that entrenched labor organizations are a net detriment to society by undermining economic growth and increasing job insecurity.

The article turns first to the labor crisis in France:

At the national level, the French example is clear enough. While the French private sector is less unionized than America's, it must cope with mandated work rules that make it all but impossible to fire someone; so naturally companies are also reluctant to hire. The jobless rate is double America's, while youth unemployment is 23%. More significant is that the political clout of public-sector unions has blocked all but minor changes in these rules. Public-sector workers account for more than a quarter of the entire French work force (6.4 million of out 24.6 million), and their salaries and pensions made up 45% of the entire state budget as recently as 2003.

For anyone who's read my previous entries on the CPE crisis currently plaguing France, this summary of problems is nothing new. Labor protections in France (among other causes, such as protectionist policies, high taxes and limits on competition) have acted to stifle economic growth. Attempts to change the policies have met with widespread disapproval, with the French trade unions leading the charge to dismantle the law and oust the government that had dared to challenge the beloved labor protections. Even as a relatively small amount of French workers are actually unionized, trade unions may still negotiate binding national labor agreements that certain industries must abide by.

The end result of the furor, if the CPE fails to pass muster, is the continued slow death of the French economy. While the trade unions and other labor forces have secured strong protections against unemployment, their efforts have only hurt national employment rates, as companies are unwilling to hire new workers who may turn out to be a costly liability.

On to Albany:

Here in the U.S., the same burden is slowly crippling New York, once a bulwark of American industry. Power in the state capital of Albany is shared by Republicans and Democrats. But both parties bow before the public-sector unions, especially the teachers, and the health-care workers led by perhaps the most powerful man in the state, Dennis Rivera.

Thanks to his political clout, New York's Medicaid costs are higher than those of Texas and Florida combined; a health-care insurance premium for a young family of four is roughly six times what it is across the border in Connecticut; and high-deductible health-savings accounts that can help the self-employed afford insurance can't even be offered in the state. New York is also a rare state that actually taxes private health insurance, to the tune of about $2.4 billion a year.

Funny how insurance costs can drop dramatically from border to border, eh. Between sweetheart healthcare deals with the larger unions and taxing private health insurance plans (what the hell is that about, really), the government managed to drive up prices for everyone else. Surprise, surprise. The net effect upon the state economy:

Thanks to immigration, as well as America's continuing advantage in financial services, New York City has so far been able to avoid another fiscal collapse of the kind it had in the 1970s. But upstate is a different story, with jobs and young people fleeing to better business climes. New York manufacturing employment fell by 41% between 1990 and 2005, or double the national rate.

New York's policies turned the state into an inhospitable climate for businesses, and businesses reacted by moving elsewhere. And speaking of manufacturers, let's look at General Motors:

But the root of its problem is that it long ago became a corporate version of the welfare state, with the same entrenched union interests. Yes, as a private company it has had to answer to shareholders. But the size of its market dominance going back to its heyday 40 years ago allowed its managers to avoid confronting its uncompetitive wages, benefits and work rules even as they saw Toyota and Honda gaining in the rearview mirror.

GM has committed a litany of errors, to be sure. From ugly and uninspired cars to corporate mismanagement and horrible quality control GM has created many of it's own demons. But the current looming problem is the cost of labor. GM is facing stiff competition from foreign car firms that manufacture their automobiles in the US and manage better quality and lower prices than GM can hope to match. Could GM find a way to convince the UAW to reduce worker overhead to compete with other companies?

In 1998, young executive and future CEO Rick Wagoner endured a 54-day UAW wildcat strike at two plants in Flint, Michigan, after GM had tried to change some production rules. The strike shut down most GM production in North America and cost the company some $2 billion. In the end GM caved and the UAW escaped, having made virtually no concessions.

Even now at auto-parts maker Delphi--which is already in Chapter 11--the UAW is declaring it will take a strike that could destroy both Delphi and GM rather than agree to Delphi's proposed job cuts and work changes. As in France and New York, these union leaders would rather sink the company than make concessions that would reduce their own power.

Well, maybe not. For GM to compete in the marketplace, the cost of labor needs to decrease quite drastically. For it's part, the UAW is taking a rather suicidal approach, hoping to string along the company for a few more years before costs reach the breaking point. Hardly the best method to ensure the continued economic security of GM's workers.

While the argument put forth by the Opinion Journal may be rather simplistic (yes, I understand this is just an editorial, not a full-blown study), I agree that on a general basis organized labor can quite definitely cause more harm than good. Through heavy restrictions on layoffs unemployment, costly deals for healthcare and required funding for bloated salaries and pensions organized labor can cool economic growth and fuel unemployment rates.

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