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U.S. Unions — Beggar Thy Employer?

Are U.S. unions to blame for the troubles of key U.S. industries?

August 1, 2005

Are U.S. unions to blame for the troubles of key U.S. industries?

Half a century ago, union power in the United States was at its peak. Fully 34% of the U.S. workforce was unionized. Unions such as the Teamsters, United Auto Workers and the United Steelworkers of America made the labor movement a force to be reckoned with.

Since then, union membership has dropped steadily. But in recent years, the decline has become more pronounced. Even as recently as 1983, union members made up over 20% of the U.S. workforce. By 2003, the share had dropped to just over 13%.

Amazingly, there was no 1920s-style union busting to cause such a precipitous decline in membership. In fact, unions themselves are partly to blame for their decline. They have simply been too successful in asking for sweeping benefits and other concessions — and, in the process, ended up bankrupting their employers.

It is not the issue of wages any more — even though union members still tend to obtain higher wages and more generous benefits from employers.

But ever since prohibitive labor costs pushed the U.S. steel industry over the brink three decades ago, organized labor has been more willing to offer wage concessions in order to preserve jobs.

More recent examples were the speedy and modest labor pacts the UAW signed with Ford and DaimlerChrysler — helped along by the sense of urgency that has befallen Detroit.

This sense of urgency was prompted by a bigger, much more serious problem, which has fully emerged only quite recently — unfunded health care and pension liabilities for retired employees.

This issue has sounded the death-knell for a number of heavily unionized industries, from automakers to airlines and steel.

In fact, it was the pensions issue — not the September 11, 2001 terrorist attacks — that has been the primary reason some large U.S. airlines were pushed into Chapter 11 bankruptcy.

Taken together, airlines face a total of around $31 billion in unfunded pension liabilities for their pilots, flight attendants, baggage handlers, mechanics and other unionized employees.

And the bankruptcy blight keeps spreading. As it stands, the U.S. automakers' turn may come close on the heels of the airlines. Here, the problem may be even more severe. Ford and General Motors together face almost $120 billion in unfunded pension and other post-employment benefits.

Concern about unfunded pension and health care liabilities has been a key factor scaring off investors and keeping the shares of the Big Three automakers down. It has also prompted ratings downgrades on their bonds to junk status, in GM’s case.

And in the steel industry, the "legacy costs" of pensions and health benefits for retired workers have long been the primary obstacle to a long overdue industry consolidation.

When it comes to finding the root cause of these various industries' troubles, unions have been getting the lion's share of the blame.

For instance, critics have complained that unions could go on strike — and put any airline out of business in a matter of days. As a result, they have been getting unreasonable wages and benefits.

Others are blaming employers. Senior management at airlines, automakers and other heavily unionized industries was willing to offer generous settlements while the business was good, ignoring the long-term implications of their largesse.

Ultimately, though, the real problem is the absence of a reliable social safety net in the United States. Americans get no comprehensive health insurance — and have to settle for a stingy public pension system.

Instead, the country has traditionally relied on employers to provide health care, pensions and retirement benefits to supplement what the public sector's social services systems fail to provide.

But what goes around comes around. By refusing to create an adequate safety net, the U.S. government has ensured that, in the end, it will have to spend a lot more money on a shoddy one.

The reason is that the government (that is, the taxpayer) will ultimately be saddled with huge costs — if heavily unionized industries go under.

For example, US Airways, the bankrupt air carrier, has already unloaded its $1.7 billion pilots' pension plan onto the lap of the Pension Benefit Guaranty Corp. (PBGC), a federal agency. The PBGC is already $23.3 billion in debt as a result of defaults by companies, and lawmakers worry it may collapse if other airlines do the same.

This is, in part, what happened to the airlines — and may now be happening to the auto industry. The liabilities they incurred to past employees became an unsustainable burden and a drain on their cash flow, making it impossible for them to weather hard times in their respective industries.

So do the unions really deserve all the blame? Without a doubt, they could have done more in the past to preserve the competitiveness of heavily unionized industries.

But in the end, can one really blame workers for wanting to have reliable pensions and health care in their old age?

What the current crisis in core U.S. industries highlights is that, in many regards, employees simply cannot win. If they work in non-unionized jobs — ranging from retailers such as Wal-Mart to the infamous "burger flipping" — they have to make do with poor to nonexistent benefits.

And if they work in industries where unions proved strong enough to fight for concessions (such as steel, airlines or automakers), workers merely helped to drive their companies out of business.

The answer to both problems would be to develop a comprehensive health care system — and to overhaul social security to allow for more than the most basic of benefits.

Given the significant costs that the taxpayer is already incurring from bailing out various corporate pension and health care liabilities, this may not be as expensive an option as many critics may think.