I couldn’t agree more with the conclusions and similarities this article from today’s Wall Street Journal draws about unions. If organizations can’t fire easily, they definitely don’t hire easily. Did you know that Michigan had the lowest rate of home price appreciation of all 50 US states last year? This theme also rings true in the Indian context….labor reform is key to a vibrant future India. I, personally, have observed the impact of unions on 2 of my former clients. At a mining client, we had a really tough time implementing pay for performance on the front line…as unions are generally anti performance based differentiation (which I’m definitely for!). At a hospital client, I saw how expenses grew uncontrollably due to unions…forcing prices up and/or profits down (usually into the red).
Here’s the article:
At first glance, they seem to have little in common. But the riots in France over labor reform, the slow-motion suicide of General Motors, and the continuing decline of the New York economy all share one defining trait: entrenched and unchangeable union power.
These columns have always favored the right to collectively bargain, and any private company that allows a union to organize its workers deserves what it gets. But that doesn’t mean we should fail to appreciate the consequences when unions become entrenched inside any organization. On the evidence throughout business and politics today, unions do not provide individual job or income security. On the contrary, they undermine security by contributing to broader business and economic decline.
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.
Is General Motors Unraveling? The current French protests are in response to a modest change that would allow employers to fire people under age 26 more easily. So entrenched has the politics of union entitlement become in France that even at the onset of their careers these young protesters are demanding security over opportunity. In the global economy, this means they will end up with less of both.
France remains a wealthy country, and its economic decline can be masked for a time as it lives off accumulated capital. But already the promises that its unions have extracted from the government seem unlikely to be kept. A growth rate of between 1% and 2% a year won’t be enough to finance the pensions and health care of an aging nation. And facing up to those facts will require an increasingly painful political reckoning.
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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.
Another union-driven business cost is workers’ compensation, and in New York the average cost per claim is second highest in the nation (after Louisiana) and 72% higher than the national average. Governor George Pataki has proposed a reform that would lower costs while actually raising the average payout for the truly disabled, but he’s run up against a French-like union roadblock in the legislature.
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.
Even Eliot Spitzer recently referred to upstate New York as “Appalachia.” Alas, the Attorney General shows no sign of understanding that the heart of the problem lies in Albany. One reason he hasn’t pursued the state’s rampant Medicaid fraud with any vigor is because it would get him crosswise with Mr. Rivera.
As for GM, its management mistakes are legion and its weak product line well-known. 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.
In retrospect, GM management should have provoked a union showdown. Yet only a very brave CEO would have been willing to risk a potentially catastrophic strike on his watch for the sake of making the company more competitive after he retired. In any case, would the United Auto Workers really have budged? 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.
This pattern has repeated itself again and again — in the steel and textile industries attacked by foreign competition, or the unionized grocery chains routed by Wal-Mart. The union answer has rarely been to work with a company to allow more job flexibility to become more competitive. The answer has typically been to seek a ruinous strike or lobby for political intervention that might stave off disaster for at best a few more years.
We recount all this because, even amid GM’s decline and France’s economic turmoil, most of America’s liberal elites refuse to draw the right lesson. They cling to the belief that if only the Democrats can retake Congress, or the union movement can once again organize more of the American labor force, the old economy of union-backed job security and egalité will return. Or, worse, they propose seceding from global competition via protectionism. It is all a delusion. Down that road lies France — a nice place to vacation, but you wouldn’t want to work there.
