By Dr. Jim Leontiades
Cyprus International Institute of Management
During a frustrating session of hard bargaining with union representatives, an exasperated manager asked the union negotiator to say frankly just what it was he wanted. He got his reply in one word, “More”.
If you think about it, the reply was obvious. If unions hire leaders they surely expect them to do something to earn their pay. In other words, they are paid to get “more”. Highly paid executives (for that is what union leaders have become) are not needed to agree to whatever is easily available. They earn their salary when they press a hard bargain, to the very limits of “more”. The danger is that they can be too successful. Under enormous pressure by strikes and stoppages, it is possible for management to concede so much that the very viability of the business is threatened.
These cases are particularly evident in the airline industry.
Bankrupt airlines and those filing for bankruptcy include Delta, United Airlines, ATA Airways, Northwest and many others. Some airlines, such as Pan American (the first scheduled airliner) have long ago gone out of business, unable to meet their payrolls. PeopleExpress, once hailed as a success story, has gone the same way. Closer to home, many readers will be familiar with the Olympic airline saga, a series of strikes, successive bankruptcies and a constantly shrinking payroll. Others, such as Air France and KLM have been forced to merge to survive. All these situations have led to the large scale unemployment of airline workers. Such cases are, of course, not limited to airlines but it is worth asking why such work related crises are so numerous in this sector.
Fixed Costs and Government Ownership
There are two good reasons. Firstly, union power is most effective in industries with high fixed costs, such as airplanes. Secondly, airlines have often been closely associated with government ownership. Airline workers represent votes and airline strikes can also bring disruption to other parts of the economy — all potential vote losers. In both cases the pressure on management, commercial and political, to avoid a strike is so enormous that agreements which are non-viable in the long run may be conceded.
Other industries with high fixed costs, such as the American automobile industry have repeatedly been confronted with strike threats. The prospect of massive plant closures forced certain concession from them that did not effect their immediate profitability. Instead of raising wages by the full amount demanded by the unions, much of the payment was shifted to the future in the form of health and retirement benefits. The executives who made the agreement have long departed but the bill for the concessions they agreed to is now due. With the passage of time payments for such benefits have risen enormously and now represent a significant portion (several thousand dollars) of the cost of every car produced. The ability of these companies to compete has been seriously undermined. General Motors, the largest car company in the world, is on the verge of bankruptcy and has announced the loss of many thousands of jobs. The British auto industry, pushed toward bankruptcy, has been sold to the Japanese who now threaten the markets of the remaining European producers.
In this connection, a theory propounded by the famous economist Mancur Olson is relevant. Professor Olson’s theory relates not only to unions but to all groups organized to promote their economic self interest, including potato farmers, taxi drivers, teachers, pilots, doctors, lawyers, pharmacists and other professions.
Briefly stated, Professor Olson holds that these groups promote their interests at the expense of the general public and the smooth functioning of the economy. Somebody has to pay for their increases. Organized pressure for higher wages results in management passing on any excessive wage demands (ie. above the level of productivity increases) to the public and particularly to those who are not members of such groups, in the form of higher prices. Government subsidies also fall on the general public as higher taxes. Particularly vulnerable are small entrepreneurs. They have to compensate their workers in line with the general wage increases and higher taxes but they have no pressure group of their own. If their businesses encounters difficulties they cannot go on strike.
As such “self interest” organizations succeed, they also multiply. Prices are increasingly set by negotiation and the political power of these self interest groups rather than the market. The operation of a free market is hindered as price signals, which dictate the allocation of resources, respond less to market forces and more to institutional and political pressure. A form of “market sclerosis” sets in hindering rapid adjustment to new technologies and the efficient operation of the economy. Ultimately this can lead to fewer jobs and higher unemployment.
Globalization had not advanced to its present stage at the time Professor Olson developed his theory. However, there is no doubt that the growth of a more integrated global economy exacerbates the negative effects of excessive union power.
Today, wage increases significantly above productivity improvements motivate management to look abroad, beyond the geographic area or country of the unions they are dealing with. Increased mobility of investment and improvements in communications mean that union pressure in one country may simply push jobs to China, Asia, India and other parts of the world. Since such movements take place over an extended time scale they may not be clearly associated with particular wage bargains. Nevertheless, it is significant and ironic that the countries that have the most union friendly political and institutional structures, such as Germany and France, are also those with the highest unemployment.
