A few weeks ago, an Ontario PC’s White Paper publication titled “Paths to Prosperity: Flexible
Labour Markets” made national headlines for proposing what some analysts called “bold” labour reforms. As usual, whenever anybody shines a negative light on unions in this country, the public reaction is rarely friendly. But whether you side with the Progressive Conservatives or unions, the issue at stake has little to do with economics, prosperity, or economic prosperity. What we are hearing are the drums of an emerging political war.
Listening to politicians talk about “the economy” is like hearing Bieber music, I struggle to find deep meanings behind these strings of words put together to please certain ears. The unions aren’t any better. Their responses have been poor. My favourite criticism comes from PSAC - Public Service Alliance of Canada; Canada’s largest public service union is calling Ontario PC’s Flexible Market a “scam”. These types of rhetoric effectively lower the credibility of both sides for a well-intentioned public discourse.
In Mr. Hudak’s introduction, he cites that Ontario lost over 300,000 manufacturing jobs since 2008. Though not stated explicitly, the underlying tone in the Ontario PC’s “Flexible Market” is to blame unions for the decline of Ontario economy, which saw a growth of just 0.3% in employment over the past year (Statistic Canada). Essentially, the Ontario PCs’ reforms attempt to reduce the power of unions as means to “open” the market and to enhance labour and capital allocation. Weaker unions imply lower wage, less workplace regulation, thus a more “flexible market” that attracts businesses and investments. Will this approach eventually lead to job creation and prosperity? I’m not the only one skeptical of this game plan. As Harvard
Professor Michael Porter points out, lower wage is not a source of long-term competitive advantage.
Even if the PCs have the right idea to improve union functions, they are selling it the wrong way to the public. Because of the general lack of substance and excessive “hand-waving” in the report, it’s not a surprise that many critics find the Ontario PC’s “paths” as a distasteful attempt to undermine union powers behind a promise of “economic prosperity”. The PCs’ mistake is fatal; as policy-makers, they are failing to understand the real problems. The critical component they missed is the dynamics between unions and employers. After all, unions cannot exist without employers. We need to balance both sides of the equation to establish an equilibrium.
At the core of the union-employer is an eternal conflict surrounding the wage. Employers want to pay less, workers want to earn more, from which forming an innate conflict. While both sides gave valid theories to support their respective stance, history provides a greater understanding on whether high wage is sustainable, and if so, under what conditions.
When Henry Ford introduced assembly lines to Ford Motors in 1913, factory workers from every corner of America converged to Detroit to work for him. Even this day, Ford Motors is proud of this segment of history. Not only did the method of assembly line production revolutionized the manufacturing industry, Ford also paid workers $5 a day while the national average was $750 a year (or less than $3 per day). $5 a day was the “American Dream”, and Ford made it possible.
How is it that an automotive company had altered the fate of Americans in such a short period of time? Answer: management. Ford Motors was able to provide such high wage and low price for its cars because its managers found a more efficient way to build cars through assembly lines; they turned production into algorithms that produced consistent results (for more on algorithm, see Roger Martin’s book “The Design of Business”). The workers are, of course, justified with such high wage because of their overall productivity. Within a decade, they turned Ford into the largest automobile manufacturer in the world.
Our “$5-a-day-at-Ford” story tells us it isn’t out-of-this-world to pay workers above-average salaries as long as the firm has the comparative advantage in the industry to back it up. Firms can become more competitive through product and process innovation, as well as sound management. Paying higher salaries could be beneficial to companies as it allows them to attract the best workers to produce products of the finest quality. There could be a “win-win” outcome for both the employer and employees. The responsibility is upon the managers to optimize their use of human resource and establish a new equilibrium at a higher wage level.
Fast forward 100 years (99 years to be exact), that “American Dream” is still alive; unions such as CAW (Canadian Auto Workers) made sure of it. According to CAW, general production workers, similar to the average workers in the 1910’s, start at about $24/hour and earn up to $34/hour excluding overtime and benefits. Skilled-trade workers can earn up to $40/hour. This translates to a starting base-salary of around $50,000 to over $80,000 per year - not bad for a high school or tech-college graduate, considering the median Canadian family/household income is only $65,000. The “American Dream” is very much alive and can still be dreamed by just about anybody willing to roll up his or her sleeve, and carry a union card.
So aren’t unions doing everyone a favour then? Not quite; not every firm is revolutionizing the industry the way Ford Motors did in 1913. And those companies who are? They pay employees well enough that they dedicate their energy to work than starting an union. Just look at Apple and Google.
While not every company needs to be “revolutionary” in order to provide a high wage, they need to be at least efficiently managed and somewhat innovative in order to be competitive in today’s economy; this is where unions enter the game. First, unions prevent optimal allocation of human resource. Second, they create a less competitive corporate culture. Third, unions put up barriers during company restructure and expansion. These setbacks ultimately robs firms’ ability to provide higher wages to employees.
Without unions, firms can freely compete for the best workers in the labour market by offering competitive salary and compensations. However, unions are changing the rules of the game. In most unionized shops, seniority matters when it comes to positional promotions. When positions open, employers are required to consider internal candidates first, with seniority acting as the deciding-factor when candidates have equal skills and qualifications. Though it sounds “innocent”, this is more significant than it appears in manufacturing, because general factory labours tend to have similar skill-set and qualification. Therefore, the only thing that sets candidates apart is seniority. The problem with “seniority” is that it favours not necessarily the most experienced workers but those who have been with the union the longest. This is problematic; as firms cannot optimize their labour allocation; well-qualified workers might just have to “wait their turn” before assuming a more advanced position. But who said life is fair? Even the Gods play favourites.
On top of promotions, seniority also provides job protection. While a union’s protectionist measures benefit many families, on the downside they create moral hazard problems for both the employees and the employer. In unionized shops, the union is responsible for workers’ salary increase, job security, compensations, and complaints. This implies that the workers will always side with the union rather than with their employer in the event of a dispute. Rather than having managers engage with their employees directly, union representation takes away the opportunity for direct communication that indeed benefits both sides. The presence of union quietly creates a fissure between the workers and the managers. As in any collective endeavour, disunity hinders overall performance.
Moreover, since both salary and security are linked to one’s seniority level, seniority, not skills, is the most sought-after quality for union members. Ironically, seniority is attained naturally and effortlessly over-time. Even if one put in the time to acquire new skills, there is no guarantee he or she will get a promotion. Job security, therefore, robs a worker’s incentive to improve and acquire new skills. This discourages the younger union members from advancing in the company through acquiring new knowledge. As most intellects would agree, a young and competitive workforce is a key ingredient of a competitive company.
The problems surrounding unions is also profound on the macro level. Unions are creating what I call a “wage bubble”, and its effects are devastating to the economy.
An economic bubble is described as “a trade in products or assets with inflated values”. Assume a worker’s work has some value, when his or her service is over-valued compared to the wage he or she receives, what we have is a wage bubble. This happens when a union limits an employer’s ability to hire the best workers at a given wage in order to protect union members, as well as when wages increase much faster than productivity.
The CAW has had significant effect on creating a wage bubble. When workers at Magna International joined CAW in 2007, their wages increased by $3/hour across the board. The union’s success in negotiating higher wages puts pressure on other firms to follow or risk losing human capital. As such, unions are affecting more than just the workers they represent. While we discussed earlier that higher wages could benefit both workers and the firm, this is no longer the case because firms are not paying the highest wages to the most deserving workers thanks to seniority clauses.
Like all bubbles, a wage bubble could build up and eventually burst to restore equilibrium. And even if does not burst, it gives manufacturers a smaller buffer to accommodate external shocks. Because of the interrelatedness of the manufacturing sector and the integration of our economy, when one firm goes down, many others are affected. Thus, a wage bubble increases the risk across the whole industry. Since about 3 out of 4 Ontario workers choose not to be part of a union, the majority of workers actually risk losing their jobs when an union inflates the wage bubble.These negative impacts of wage bubble to the economy outweigh its benefits to a smaller portion of protected, unionized veteran workers.
While some economists dismiss the existence of “bubbles”, arguing that the market always trades at a “fair price”, this reason has little grounds in the labour market. Unions often succeed in negotiating above-equilibrium wages for their workers by leveraging its size or using pressure tactics such as general strike. This means that the wage level is artificially constructed and not a result of free-market.
If you are an optimistic thinker like me, then we may not always see firm failure to be the end of the world. Through creative destruction, productive companies could take over the idling resources and immediately put them into more efficient use. This speeds up the recovery process and increases economic output. But once again, union protection haunts again. Common in collective agreements are seniority clauses that protect veteran workers from layoffs or salary-decrease. This means that productive firms cannot upgrade their workforce as they wish when they have the opportunity to do so. Furthermore, with unions’ codified tasks and responsibilities at each position, companies face greater difficulties in expansion through merger and acquisition. Altogether, these restrictions effectively slow down the process of creative destruction and economic recovery.
The economic environment is changing. Union laws need to change, so do corporate laws.
As much as unions are to take blame for certain inefficiencies, the root of the issue remains with the management. Unions are the products of when push comes to shove. Unions are the absolute last resort for workers to protect themselves in terms of both health and wealth. The discrepancy of power between employers and workers allow room for abuse. To not address the issue of exploitative management is to be ignorant of an inherent misfortune of capitalism. Since it is the workers who ultimately have the choice to unionize, good firms will satisfy their employees in a manner that they wouldn’t need to unionize. Competitive firms rely on competitive strategies rather than lower wages; unions need to let loose of certain constraints on management so that the company can be competitive.
What the Ontario PCs have discussed is only the tip of the iceberg surrounding what I think is the most critical economic topic for the next 5-7 years. While unions have been an integral part of economic history, some unions are heading in a wrong direction. Often unions react abruptly to the global economic climate using their shear size and power, and in the process creating more harm than good.
The government has yet to react to this shift in dynamics. While the problem of “too-big-to-fail” is addressed to the banks, unions should be viewed through the same lens. In Canada, PSAC (172,000 members) has been active in its Third-Choice campaign against austerity measures. CUPE, Canada’s largest unions, has an astonishing 618,000 members. CAW and CEP, representing 200,000 and 315,000 workers respectively, are set to merge. Ontario teachers are set to strike this coming fall if a new deal is not reached with the provincial government. Under current labour law, unions of this size pose tremendous threat to the stability of our society, as they represent workers in every aspect of our lives.
Unfortunately the Ontario PC is taking the wrong approach to address this issue. All of the PCs’ proposed “paths”, with the exception of closed-tendering, actually have nothing to do with the economy when the matter deeply concerns our country’s cornerstone of democracy. When large unions take political stance on behalf of their members, who have no choice but to associate, they infringe on the individual liberty. The Ontario PC caucus needs not to hide behind with “economic prosperity” to abolish the Rand formula. All workers, regardless of union status, are entitled to a fair wage and an acceptable working environment; these should not be something a worker obtains through paying union dues.
Perhaps one way to restore equilibrium is to give people the choice. Rather eliminating unions, the government should work to ensure workers their right to unionize. A true and democratic representation will reveal poorly managed firms, make good unions even stronger, and weaken the corrupt organizations – all of which benefit our society.
In the years ahead as global economies face greater uncertainties, our society will become greater polarized. People will simply take a stance and place the blame on another group. Yet the fact of the matter is, we are all in this together.
Labour Markets” made national headlines for proposing what some analysts called “bold” labour reforms. As usual, whenever anybody shines a negative light on unions in this country, the public reaction is rarely friendly. But whether you side with the Progressive Conservatives or unions, the issue at stake has little to do with economics, prosperity, or economic prosperity. What we are hearing are the drums of an emerging political war.
Listening to politicians talk about “the economy” is like hearing Bieber music, I struggle to find deep meanings behind these strings of words put together to please certain ears. The unions aren’t any better. Their responses have been poor. My favourite criticism comes from PSAC - Public Service Alliance of Canada; Canada’s largest public service union is calling Ontario PC’s Flexible Market a “scam”. These types of rhetoric effectively lower the credibility of both sides for a well-intentioned public discourse.
In Mr. Hudak’s introduction, he cites that Ontario lost over 300,000 manufacturing jobs since 2008. Though not stated explicitly, the underlying tone in the Ontario PC’s “Flexible Market” is to blame unions for the decline of Ontario economy, which saw a growth of just 0.3% in employment over the past year (Statistic Canada). Essentially, the Ontario PCs’ reforms attempt to reduce the power of unions as means to “open” the market and to enhance labour and capital allocation. Weaker unions imply lower wage, less workplace regulation, thus a more “flexible market” that attracts businesses and investments. Will this approach eventually lead to job creation and prosperity? I’m not the only one skeptical of this game plan. As Harvard
Professor Michael Porter points out, lower wage is not a source of long-term competitive advantage.
Even if the PCs have the right idea to improve union functions, they are selling it the wrong way to the public. Because of the general lack of substance and excessive “hand-waving” in the report, it’s not a surprise that many critics find the Ontario PC’s “paths” as a distasteful attempt to undermine union powers behind a promise of “economic prosperity”. The PCs’ mistake is fatal; as policy-makers, they are failing to understand the real problems. The critical component they missed is the dynamics between unions and employers. After all, unions cannot exist without employers. We need to balance both sides of the equation to establish an equilibrium.
At the core of the union-employer is an eternal conflict surrounding the wage. Employers want to pay less, workers want to earn more, from which forming an innate conflict. While both sides gave valid theories to support their respective stance, history provides a greater understanding on whether high wage is sustainable, and if so, under what conditions.
When Henry Ford introduced assembly lines to Ford Motors in 1913, factory workers from every corner of America converged to Detroit to work for him. Even this day, Ford Motors is proud of this segment of history. Not only did the method of assembly line production revolutionized the manufacturing industry, Ford also paid workers $5 a day while the national average was $750 a year (or less than $3 per day). $5 a day was the “American Dream”, and Ford made it possible.
How is it that an automotive company had altered the fate of Americans in such a short period of time? Answer: management. Ford Motors was able to provide such high wage and low price for its cars because its managers found a more efficient way to build cars through assembly lines; they turned production into algorithms that produced consistent results (for more on algorithm, see Roger Martin’s book “The Design of Business”). The workers are, of course, justified with such high wage because of their overall productivity. Within a decade, they turned Ford into the largest automobile manufacturer in the world.
Our “$5-a-day-at-Ford” story tells us it isn’t out-of-this-world to pay workers above-average salaries as long as the firm has the comparative advantage in the industry to back it up. Firms can become more competitive through product and process innovation, as well as sound management. Paying higher salaries could be beneficial to companies as it allows them to attract the best workers to produce products of the finest quality. There could be a “win-win” outcome for both the employer and employees. The responsibility is upon the managers to optimize their use of human resource and establish a new equilibrium at a higher wage level.
Fast forward 100 years (99 years to be exact), that “American Dream” is still alive; unions such as CAW (Canadian Auto Workers) made sure of it. According to CAW, general production workers, similar to the average workers in the 1910’s, start at about $24/hour and earn up to $34/hour excluding overtime and benefits. Skilled-trade workers can earn up to $40/hour. This translates to a starting base-salary of around $50,000 to over $80,000 per year - not bad for a high school or tech-college graduate, considering the median Canadian family/household income is only $65,000. The “American Dream” is very much alive and can still be dreamed by just about anybody willing to roll up his or her sleeve, and carry a union card.
So aren’t unions doing everyone a favour then? Not quite; not every firm is revolutionizing the industry the way Ford Motors did in 1913. And those companies who are? They pay employees well enough that they dedicate their energy to work than starting an union. Just look at Apple and Google.
While not every company needs to be “revolutionary” in order to provide a high wage, they need to be at least efficiently managed and somewhat innovative in order to be competitive in today’s economy; this is where unions enter the game. First, unions prevent optimal allocation of human resource. Second, they create a less competitive corporate culture. Third, unions put up barriers during company restructure and expansion. These setbacks ultimately robs firms’ ability to provide higher wages to employees.
Without unions, firms can freely compete for the best workers in the labour market by offering competitive salary and compensations. However, unions are changing the rules of the game. In most unionized shops, seniority matters when it comes to positional promotions. When positions open, employers are required to consider internal candidates first, with seniority acting as the deciding-factor when candidates have equal skills and qualifications. Though it sounds “innocent”, this is more significant than it appears in manufacturing, because general factory labours tend to have similar skill-set and qualification. Therefore, the only thing that sets candidates apart is seniority. The problem with “seniority” is that it favours not necessarily the most experienced workers but those who have been with the union the longest. This is problematic; as firms cannot optimize their labour allocation; well-qualified workers might just have to “wait their turn” before assuming a more advanced position. But who said life is fair? Even the Gods play favourites.
On top of promotions, seniority also provides job protection. While a union’s protectionist measures benefit many families, on the downside they create moral hazard problems for both the employees and the employer. In unionized shops, the union is responsible for workers’ salary increase, job security, compensations, and complaints. This implies that the workers will always side with the union rather than with their employer in the event of a dispute. Rather than having managers engage with their employees directly, union representation takes away the opportunity for direct communication that indeed benefits both sides. The presence of union quietly creates a fissure between the workers and the managers. As in any collective endeavour, disunity hinders overall performance.
Moreover, since both salary and security are linked to one’s seniority level, seniority, not skills, is the most sought-after quality for union members. Ironically, seniority is attained naturally and effortlessly over-time. Even if one put in the time to acquire new skills, there is no guarantee he or she will get a promotion. Job security, therefore, robs a worker’s incentive to improve and acquire new skills. This discourages the younger union members from advancing in the company through acquiring new knowledge. As most intellects would agree, a young and competitive workforce is a key ingredient of a competitive company.
The problems surrounding unions is also profound on the macro level. Unions are creating what I call a “wage bubble”, and its effects are devastating to the economy.
An economic bubble is described as “a trade in products or assets with inflated values”. Assume a worker’s work has some value, when his or her service is over-valued compared to the wage he or she receives, what we have is a wage bubble. This happens when a union limits an employer’s ability to hire the best workers at a given wage in order to protect union members, as well as when wages increase much faster than productivity.
The CAW has had significant effect on creating a wage bubble. When workers at Magna International joined CAW in 2007, their wages increased by $3/hour across the board. The union’s success in negotiating higher wages puts pressure on other firms to follow or risk losing human capital. As such, unions are affecting more than just the workers they represent. While we discussed earlier that higher wages could benefit both workers and the firm, this is no longer the case because firms are not paying the highest wages to the most deserving workers thanks to seniority clauses.
Like all bubbles, a wage bubble could build up and eventually burst to restore equilibrium. And even if does not burst, it gives manufacturers a smaller buffer to accommodate external shocks. Because of the interrelatedness of the manufacturing sector and the integration of our economy, when one firm goes down, many others are affected. Thus, a wage bubble increases the risk across the whole industry. Since about 3 out of 4 Ontario workers choose not to be part of a union, the majority of workers actually risk losing their jobs when an union inflates the wage bubble.These negative impacts of wage bubble to the economy outweigh its benefits to a smaller portion of protected, unionized veteran workers.
While some economists dismiss the existence of “bubbles”, arguing that the market always trades at a “fair price”, this reason has little grounds in the labour market. Unions often succeed in negotiating above-equilibrium wages for their workers by leveraging its size or using pressure tactics such as general strike. This means that the wage level is artificially constructed and not a result of free-market.
If you are an optimistic thinker like me, then we may not always see firm failure to be the end of the world. Through creative destruction, productive companies could take over the idling resources and immediately put them into more efficient use. This speeds up the recovery process and increases economic output. But once again, union protection haunts again. Common in collective agreements are seniority clauses that protect veteran workers from layoffs or salary-decrease. This means that productive firms cannot upgrade their workforce as they wish when they have the opportunity to do so. Furthermore, with unions’ codified tasks and responsibilities at each position, companies face greater difficulties in expansion through merger and acquisition. Altogether, these restrictions effectively slow down the process of creative destruction and economic recovery.
The economic environment is changing. Union laws need to change, so do corporate laws.
As much as unions are to take blame for certain inefficiencies, the root of the issue remains with the management. Unions are the products of when push comes to shove. Unions are the absolute last resort for workers to protect themselves in terms of both health and wealth. The discrepancy of power between employers and workers allow room for abuse. To not address the issue of exploitative management is to be ignorant of an inherent misfortune of capitalism. Since it is the workers who ultimately have the choice to unionize, good firms will satisfy their employees in a manner that they wouldn’t need to unionize. Competitive firms rely on competitive strategies rather than lower wages; unions need to let loose of certain constraints on management so that the company can be competitive.
What the Ontario PCs have discussed is only the tip of the iceberg surrounding what I think is the most critical economic topic for the next 5-7 years. While unions have been an integral part of economic history, some unions are heading in a wrong direction. Often unions react abruptly to the global economic climate using their shear size and power, and in the process creating more harm than good.
The government has yet to react to this shift in dynamics. While the problem of “too-big-to-fail” is addressed to the banks, unions should be viewed through the same lens. In Canada, PSAC (172,000 members) has been active in its Third-Choice campaign against austerity measures. CUPE, Canada’s largest unions, has an astonishing 618,000 members. CAW and CEP, representing 200,000 and 315,000 workers respectively, are set to merge. Ontario teachers are set to strike this coming fall if a new deal is not reached with the provincial government. Under current labour law, unions of this size pose tremendous threat to the stability of our society, as they represent workers in every aspect of our lives.
Unfortunately the Ontario PC is taking the wrong approach to address this issue. All of the PCs’ proposed “paths”, with the exception of closed-tendering, actually have nothing to do with the economy when the matter deeply concerns our country’s cornerstone of democracy. When large unions take political stance on behalf of their members, who have no choice but to associate, they infringe on the individual liberty. The Ontario PC caucus needs not to hide behind with “economic prosperity” to abolish the Rand formula. All workers, regardless of union status, are entitled to a fair wage and an acceptable working environment; these should not be something a worker obtains through paying union dues.
Perhaps one way to restore equilibrium is to give people the choice. Rather eliminating unions, the government should work to ensure workers their right to unionize. A true and democratic representation will reveal poorly managed firms, make good unions even stronger, and weaken the corrupt organizations – all of which benefit our society.
In the years ahead as global economies face greater uncertainties, our society will become greater polarized. People will simply take a stance and place the blame on another group. Yet the fact of the matter is, we are all in this together.
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| MUNACA Strike - Halloween 2011 |
