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  • Why We Need Labor Unions
    Posted On: Dec 06, 2012

    Why We Need Labor Unions After All
    By Henry Blodget | Daily Ticker

    There are many reasons why some executives don't like labor unions.

     •They can create an "us versus them" culture within companies and organizations, instead of putting everyone on the same team

     •They can create a culture of entitlement

     •They can restrict flexibility and hurt competitiveness

     •They can drive companies to move jobs out of the country, to places where there are no unions

     •They can become career employment for their leaders, who pay themselves well (much better than the workers they're representing)

     •They can maintain ludicrous compensation and benefit levels for jobs based purely on seniority

     •They can force companies to treat all union employees equally, regardless of the relative skill and value of particular employees--thus reducing incentives for people to do a great job

     •Etc.

    But unions came into being because company owners weren't sharing enough of their companies' wealth with the rank-and-file employees who helped produce it. Look at the news headlines over the past few weeks -- employees are speaking out against low pay and no benefits. Hostess Brands, the maker of the iconic Twinkie, is closing because of a standoff with its union employees, but a judge recently ruled that Hostess management will still receive bonuses before the company is liquidated. Employees at American Airlines, Wal-Mart and fast food chains in New York City are protesting unfair pay practices. Members of the International Longshore and Warehouse Union Local 63 Office Clerical Unit in California are striking over charges that terminal operators have outsourced jobs.

    And, unfortunately, with the decline of labor unions, that lack of sharing is again increasing

    Namely, we've developed inequality so extreme that it is worse than any time since the late 1920s.

    Contributing to this inequality is a new religion of shareholder value that has come to be defined only by "today's stock price" and not by many other less-visible attributes that build long-term economic value.

    Like many religions, the "shareholder value" religion started well: In the 1980s, American companies were bloated and lethargic, and senior management pay was so detached from performance that shareholders were an afterthought.
    But now the pendulum has swung too far the other way. Now, it's all about stock performance--to the point where even good companies are now quietly shafting other constituencies that should benefit from their existence. Most notably: Rank and file employees.

    Great companies in a healthy and balanced economy don't view employees as "inputs." They don't view them as "costs." They don't try to pay them "as little as they have to to keep them from quitting." They view their employees as the extremely valuable assets they are (or should be). Most importantly, they share their wealth with them.

    Consider the following:

    1) Corporate profit margins just hit an all-time high. Companies are making more per dollar of sales than they ever have before.

    2) Wages as a percent of the economy are at an all-time low. One reason companies are so profitable is that they're paying employees less than they ever have before.

    When presented with these facts, many people invoke one of two arguments. First, technology is making employees irrelevant. Second, low-skill jobs command low pay.

    Both of these arguments miss key points: Technology has been making some jobs obsolete for 200+ years now, but it is only recently that corporate profit margins have gone through the roof. Just because you can pay full-time employees so little that they're below the poverty line doesn't mean you should--especially when retention is often a problem and your profit margin is extraordinarily high.

    More broadly, what's wrong with this?

    What's wrong is that an obsession with a narrow view of "shareholder value" has led companies to put "maximizing current earnings growth" ahead of another critical priority in a healthy economy: Investing in human and physical capital and future growth.

    If American companies were willing to trade off some of their current earnings growth to make investments in wage increases and hiring, American workers would have more money to spend. And as American workers spent more money, the economy would begin to grow more quickly again. And the growing economy would help the companies begin to grow more quickly again. And so o

    But, instead, U.S. companies have become so obsessed with generating near-term profits that they're paying their employees less, cutting capital investments, and under-investing in future growth.

    This may help make their shareholders temporarily richer.

    But it doesn't make the economy (or the companies) healthier.

    And, ultimately, as with any ecosystem that gets out of whack, it's bad for the whole ecosystem.
    So, for the sake of the economy, we have to fix this problem.

    Ideally, we would fix it by getting companies to voluntarily share more of their wealth with their employees. But the "shareholder value" religion has now been so thoroughly embraced that any suggestion of voluntary sharing is viewed as heresy.

    (You've heard all the responses: "The only duty of a company is to produce the highest possible return for its owners!" "If employees want to make more money, they should go start their own companies!" Etc. Beyond basic fairness and the team spirit of we're-all-in-this-together, what these responses lack is any appreciation of the value of personal loyalty, retention, respect, and pride in the workforce. People love working for companies that treat them well. And they'll go to the mat for them.)

    Anyway, it would be great if companies would start sharing their wealth voluntarily. But, as yet, with a couple of notable exceptions (Apple recently gave its store employees a raise it didn't need to give them), they've shown no signs of doing that.

    So if companies can't be persuaded to do this on their own, maybe it's time for executives to rethink their view of labor unions.

    Although correlation is not causation, the chart below suggests that labor unions might be able to help induce companies to share their wealth, at least in some industries.

    Healthy capitalism is not about "maximizing near-term profits." It is about balancing the interests of several critical constituencies:

     •Shareholders
    •Customers
    •Employees
    •Society, and
    •The Environment

    It's time more of our business leaders started to understand that.


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