Unions are a menace to society and stand in the way of free enterprise. That’s the predominant message preached in US business schools. Like most good students, I took what my professor’s told me as a fact, rather than what it really is – a political statement of expediency. True, unions constrain the free flow of capital just as all regulations do, whether they are workplace regulations or environmental regulations. After all, the term “free market” is a misnomer. As any economist will gladly tell you, there is no truly free market.
Regulations by definition “regulate”, meaning they create a framework within which businesses compete. It is up to the companies to compete successfully while adhering to the rules of the game. Why is it than that some companies excel in unionized environments while others do not?
The website Remapping Debate.org posted an excellent article that delves into this issue. Specifically, it examines how unionized automakers in Germany are highly successful while US automakers that are unionized often blame their unions for making them uncompetitive. The average salary of a unionized US auto employee is about half of his or her German counterpart. Yet these German companies manage to overcome their higher cost structures and earn billions in profits.
How is this possible? There are two driving factors: costs and revenues. On the cost side, as the article explains, the legal structures in Germany are very different from those in the US. For one, unionized and non-unionized employers face much stricter labor rules. Whereas in the US, most employees can be laid off for almost any reason, a legal principle known as termination without cause, this is not the case in Germany. There, employers must have a thoroughly documented history of negative performance reviews to justify letting an employee go.
Worker protections are stronger in Germany. All German companies have councils made up of employees whose purpose is to represent employees at the organizational level. The councils, known as Betriebsräte, advocate for employees, particularly for minorities, women and the handicapped. In addition, it’s the councils' job to ensure that work rules established in national labor agreements are applied correctly at the local level. This system ensures that ordinary workers are exposed to and interact with management, which has a tendency to build trust and allows each party to better understand the other.
Unlike their German competitors, US firms operate largely immune from outside influences. As such, US unions are the only meaningful counterweight to management’s control of a company. This naturally leads to adversarial relationships. Further complicating the matter is that in Germany, companies are unable to escape unions whereas in the US union influence can be severely curtailed by moving operations to non-union states. This “opt-out” strategy provides significant leverage to employers. It is also something German manufacturers take advantage of when building assembly plants in the US; which are all in non-union states.
What the article does not address is the revenue side of our economic comparison. In order to be profitable with higher costs, revenue must be higher as well. This is why you rarely see any German companies compete on price. They can’t. Instead, German companies sell at the high-end of their respective markets. Does that mean a higher cost structure due to unionized employees is only viable for companies with high profit margins? Perhaps so. A better conclusion would be that companies with high labor costs (and presumably high overall costs) have difficulty competing on price. No wonder GM was happy to sell trucks in the 90’s while neglecting other, less profitable segments of the market
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