16 June 2011

The Absurdity of Unions

I generally avoid politically-charged topics that don’t directly relate to business, but a recent Business Week article about the US Postal Service reminded me of a controversial topic that impacts all of us: organized unions. Although once essential to protect worker rights, modern day unions have become irrelevant, destructive, and a microcosm of all that’s wrong in the current debt laden climate.

The article talked about the imminent demise of the postal service system and how little can be done to stop the train wreck in large part because of the labor contracts with the union. It’s unusual for anything from Washington to done on time, but the report was released 18 months early because the situation had gotten so bad. As the walls of the post office are crumbling down, the unions have extracted more and more for themselves. They point to a “win-win” by their recent negotiation which yielded guaranteed raises for the next seven years and forbids any layoffs. Win win ?

The main reason the postal system is in shambles is precisely because it can’t right-size to current market conditions. For years, unions have negotiated to the point of an unsustainable cost structure which does not allow them to shed locations or any of its 500,000 FTEs.  Meanwhile, the demand for their services continues to decline.  The unions are well aware of the imminent demise and are angling for a taxpayer bailout. Given the government’s recent track record, I see this as an almost guaranteed outcome. It seems this may happen as early as 2012.

The frustrating thing is that there are solutions. The three year study explored countries throughout the world for ideas that worked. Most privatized, modernized, expanded digital services, and outsourced offices to third parties. In Germany, Deutsche Post has turned around so remarkably that it actually began making acquisitions (DHL). The irony is laughable – the US has now become the model of unsustainable socialism while Europe has taken a more capitalistic approach to solving real problems.

The auto bailouts were another sign of union carnage. From start to finish, the talks were tipped in the favor of politically powerful unions. The government threw out the bankruptcy rules and ultimately handed over controlling interest to the unions (they became the largest shareholder in Chrysler and second behind the federal government in GM). What happened to the Ma and Pa with GM bonds that were supposed to be first on the capital stack? Gone. And for what purpose? We actually rewarded those that caused the problem in the first place (too high labor costs compared to Japanese competitors). And the bankruptcy rules were completely ignored in the process? Welcome to the alternate universe.

The list goes on and on. State and local governments are in shambles thanks to unfunded liabilities negotiated by hard charging unions.   The paltry 401(k) company contributions will not make a dent in most retirement requirements – in large part because of the unfunded liabilities corporations continue to pay to retirees. The unions are simply too powerful to address the real problems we face. Instead, the Bidens of the world focus on immaterial items like website optimization (yes that was top of his list) which won’t solve our huge deficit gap. We all suffer as a result. Tax increases, cuts in services, debt for many generations to come.

When I think about how much damage has been caused by the short-sighted minds of the union, it takes me back to my free market roots. Capitalism is simply the most efficient allocation of resources unfettered by the cloud of politics, power, and gluttony. For all its shortcomings, the other side of the pendulum is far more grim. These golden packages negotiated by unions have no relation to market conditions and will ultimately be paid by all of us one way or the other.  We don't fix the problems, we just give in to those that are responsible.  Their solution to solving the postal service problems: stop the internet. I’m not kidding; just ask the postal employee whose only job is to convince large banks to continue sending out paper statements. Help. Someone please bring capitalism back.


  1. And now Apple store employees are trying to form a union too! No, don't make those devices more expensive!!

  2. Very good read.....
    I agree that unions are detrimental to any company's well being in today's era. But keep in mind, the same unions were the force behind America's dominance for the most part of the last century. And at that time Unions were the next best thing since slice bread. People had money that in turn created more spending which in turn resulted in more business for various businesses.
    Fast forward to today's world/past 2 decades - What has happened is that developing countries where labor rates and cost of living is very low started to magnetize manufacturing jobs from the US to save US companies millions (and maybe billions) of dollars. Obviously with or without Unions, the cost of doing business / manufacturing in America is much more cost prohibitive when compared to the developing nations. In my opinion - that’s where the issue lies, until America and such developing countries reach parity in terms of labor costs, America will always be at a disadvantage. There is a lot of talk about how US companies have to reinvent themselves to move higher in the pyramid chain like focus on R&D that leads to innovation and in order to achieve this there should be lot more emphasis on education! Guess what - Apple, probably the most innovative US company of any kind have kept their focus on R&D/innovation in the US and that resulted in 50,000 US based jobs. Great for the US economy, isn't it??? Absolutely not - what we don't realize is that the same company Apple has created over a million jobs in China through it's outsourced manufacturing plants. Why? It’s not = because the Chinese worker is more skilled than American worker but it’s more due to the fact that the cost of labor is cheaper in China - period!!! This results in huge cost savings for Apple – with or without Unions there is no way Apple can realize the same cost savings if they were to manufacture their phones in the US!!!!
    So in conclusion – I am of the opinion until we reach parity for the cost of doing business in the US and the developing countries, we will be faced with such challenging dynamics. Maybe 30 to 40 yrs from now there will be a point where manufacturing in China will be as expensive or cheap as manufacturing in the US. And all of a sudden you can see the balance of economy power will start to shift to Africa, maybe??
    Sorry I may be rambling here……but wanted to share my thoughts :-)

  3. sorry, i also meant to say in conclusion that - Capitalism alone would not solve the issue America is faced with. It may bring down the cost of doing business in the US but it will not generate new jobs for the econimy and that to me is the bigger issue.

  4. Nice points. There certainly was a time and place for unions, but it has come and gone. I agree with the cost parity issue, but unions and unsustainable costs have created a bigger gap that we have to overcome. We are paying for costs and benefits that bring no current value to society. Taxes, debt and cuts in education will further widen the gap.

    Great point on capitalism and the Apple example. Are we better off with 50k jobs at the expense of 1M chinese ones ? Capitalism is not perfect, but cronyism and socialism lead to worse results as unions and Washington politics illustrate.

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