12/12/12 – Twilight of the Unions?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 12, 2012 10:10:12 AM

and tagged Yesterday's News

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UAWThe primary story today is the imposition of restrictions on unions in Michigan, home of the United Auto Workers and once seen as a mainstay of the union movement. This news hit the front pages of the Wall Street Journal, with “Unions Dealt Blow in UAW’s Home State,” and the New York Times, with “Limits on Unions Pass in Michigan, Once a Mainstay.”

The story is important for the obvious reasons, such as the continuing erosion of worker power, but it is also important for some less obvious ones. Among these is that the erosion of wage bargaining power makes general price inflation less likely. A key driver of the out-of-control inflation in the U.S. during the 1970s was the wage-price spiral. At the time, wages were indexed to increase with prices, largely through union contracts, and the two fed each other in an increasing spiral. Today, as the membership and power of unions erode, wage-price inflation is becoming less of a worry for the economy as a whole.

According to the U.S. Bureau of Labor Statistics, union membership has dropped substantially since the 1970s, from about 22 percent of wage and salary workers to about 12 percent. In addition, the composition of union membership has changed significantly, with a much larger proportion now being public sector employees. More than 37 percent of workers in the public sector are union members—five times as many as in the private sector, where 6.9 percent of employees belong to unions. Possibly because of this, public support of unions has also eroded, with Michigan only the latest historically pro-union state to limit union powers, after Indiana and Wisconsin.

As trends go, this is not consistent with the recent re-election of the president or with Democrat gains in both legislative bodies, making it questionable how much further it will go, although even Democrats in recent years have started to back away from consistent union support. It is consistent, however, with much greater Republican control of statehouses, and in that it can be expected to continue. In addition, it is consistent with a globalized economic environment and with interstate economic competition in the U.S., as manufacturers have chosen to locate new plants in right-to-work states, usually in the South. States in the Midwest such as Michigan have to some extent been driven to limit union powers by the need to compete.

The passing of Obamacare may also make unions less relevant going forward. If they are unable to increase wages for economic reasons, and if benefits are decoupled from employment, the utility of the unions may be perceived as declining, even among current members.

Finally, the reason for unions in the first place—to protect workers against the demands of capital—is arguably less applicable when the employer is a government, as it is not a profit-maximizing entity. As such, and as union pay increasingly becomes a zero-sum game, where taxpayers, especially at the local level, are directly paying those salaries and benefits, above-market deals become more difficult to defend.

Overall, the drop in union support and consequent political limitation of their privileges seem to reflect the change in the composition of the membership, from private to public, and the change in the structure of the economy as a whole; and, therefore, this situation is unlikely to change. Any political shift is more likely to act to mitigate this outside the union structure than to bring the unions back to their previous role.

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