Skip to comments.Unions: Good or Bad?
Posted on 10/30/2003 10:50:34 AM PST by proud_member_of_ VRWC
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.
Some more problems with unions:
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?
If a company wants to avoid unionization, what is its best strategy?
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.
Stories like this are what truly boils my blood. In my humble opinion, I feel that today's organized labor movement has done nothing to protect worker's rights, but everything to promote laziness and incompetency. The most recent cause of outrage was the unionizing of the Transportation Security Administration (TSA). Organizations such as the TSA are where we need only the most competent and diligent employees. So in other words, unionized labor is now helping to promote breeches in our national security. To some that may sound like a meritless claim. However, I don't see it as anything but the truth.
Where I work, the Union and company agreed upon a two-tier wage system a few years back: lower pay scales for new employees, up to $4.00 less maximum pay than employees who were already on board.
The new, young, gung-ho employees soon came to resent the older, top-wage earning people who didn't want to do the heavy lifting (literally) because of bad backs, bad knees, etc. (They call it being "retired in place").
The end result was that the young people with any incentive and ambition voted with their feet, lured away by other companies who weren't unionized. This left the old, worn-out employees making top dollar, just marking time until retirement, and young, marginally-talented resentful people that no one else wanted to hire.
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