Unions: good for equity, good for efficiency

Huh? This is even more than expectedly counter-factual.

Is there any evidence, anywhere, that American unionized firms are more efficient? (Efficient = productive, controlled for capital levels.)

Toyota’s innovation in organizing production is much more complex than simply the role of unions. Indeed, Japanese unions are company unions that do not play the same role of adversarial wage bargaining that is the core function of the European-American labor union. In order to understand the lean production system, one must read Taiichi Ohno’s 1978 book (translated in 1989 as “Toyota Production System: Beyond Large Scale Production.”). While there are other strands of practice and intellectual history that contribute to it, Ohno invented what is now called lean production or the Toyota Production System and identifies its core elements. Krafcik’s 1988 MIT thesis on comparative production flows in auto manufacturing that coined the term “Lean Production” is also useful for an outsider’s perspective on Ohno’s system.

In order to understand the role of labor in the Toyota production system and see the flaws in equating the Toyota model to higher productivity in unionized firms, I *strongly* recommend Satoshi Kamata’s 1973 book (translated by Akimoto in 1982 as “Japan in the Passing Lane: An Insider’s Account of Life in a Japanese Auto Factory.”) Kamata was a journalist who worked under cover in the Toyota Koromo factory for a season and reported the ways in which the Toyota production system exploits certain categories of workers and uses social network structures to extract greater effort and attention from them than would be possible by traditional Taylorist managers.

Addressing the overall point, research from Sweden and Germany does suggest that Works Council systems can increase productivity by mobilizing the intellectual abilities of workers to solve production bottlenecks and introduce applied innovations (the best theoretical frame for this effect is probably Polanyi’s concept of tacit knowledge linked with networked problem solving) without the kinds of systems described by Kamata, it is difficult to draw general conclusions about the productivity effect of unionization from the Toyota case or philosophy.

I know the literature on productivity and unions reasonably well, and the evidence for a positive link is most definitely not compelling. Ambiguous and really difficult to pin down, especially once one tries to take the endogeneity of unionization into account, seems like a more accurate characterization.

On a more conceptual level, if practices like higher job security, worker empowerment, better grievance procedures, and so on that you associate with unions do indeed lead to higher productivity, why haven’t companies figured this out and offered these kind of contracts and practices by themselves? You argument seems to require not only that certain union-associated practices improve productivity, but also that firms are too stupid to recognize that and opt to leave these efficiency gains on the table. Or am I missing something here?

commenterlein: ” . . .You(r) argument seems to require not only that certain union-associated practices improve productivity, but also that firms are too stupid to recognize that and opt to leave these efficiency gains on the table. . . ”

Of course firms know that treating workers decently improves productivity. That’s why slavery never existed.

Or am I missing something here?

Yes, you are. Many in upper management do not have the best interest of the company in mind. They are not working towards a common goal. They are pursuing their own narrow self interest. America has conflated greed with the common good for too long. We’ve paid the price for Nash’s paranoid schizophrenia for decades.

In Asian cultures working for the good of the company is woven into the fabric of their lives. It’s unthinkable for management to be as self centered and, frankly, sociopathic, as American managers can be. When an America CEO suicides because he let the company down is when we’ll start seeing some changes. Don’t hold your breath.

Noen,

Even if I agreed with you, I don’t think you answered my question. Kathy’s argument seems to be that certain practices she associates with unions raise productivity. If so, then the selfish greed you dislike should motivate managers and shareholders to push for the same practices in order to reap those productivity gains.

Tangential threadjack, but:

America has conflated greed with the common good for too long. We’ve paid the price for Nash’s paranoid schizophrenia for decades.

People have been conflating a much-disliked school of economics with a mathematician for far too long. I for one fail to see how the demonstration that all Riemannian manifolds can be isometrically embedded as a submanifold of a Euclidean space has any relevance to unions. Game theory’s a bit of a stretch too, really.

It’s a trivial but powerful argument (which does not rely on market perfection), and dismissing it out of hand makes little sense.

In fact I would claim that Noen’s argument that capitalists and / or managers would leave productivity gains on the table because they are greedy makes a lot less sense.

Look, if Kathy or anyone else wants to make the argument that market and / or organizational imperfections prevent firms from making productivity-maximizing changes to their work practices, then I am more than happy to entertain it. Let’s talk about what these imperfections are, why firms can’t solve them by themselves, and how one might help them to do so. For example, why don’t firms offer employment contracts with enhanced job security, if that would increase productivity?

As an aside, the observation that jobs that require more employee autonomy and creativity are less likely to be unionized than others seems to be evidence against Kathy’s hypothesis.

Years ago I worked as a glazier in both union an non-union shops. While there were some things I definitely liked about the union (the pay and the caliber of my co-workers), my relationship to the business and to management was definitely much more remote which is not necessarily a good thing. My stake was in the success of the union, not the company I worked for.

There’s nothing specific to the communication model between a union employee and the company that would be an advantage in implementing a broader participation of the employee in the business. My communication with the business and management was, like my relationship to them, very restricted and formalized. The path for grievances was through the shop steward who had better things to do than to relay my bright ideas about running the business to management.

The very nature of the loyalties involved would make it not only more difficult to implement, but more difficult to motivate as well. There’s no way for the company to provide incentives for contributions that are beyond the scope of the union contract, and no career path to allow an employee to move from assembly line worker to industrial engineer.

Kathy, that’s fantastic. I now see that the only serious research on the subject is also the only research you are familiar with. I don’t even know what to say to this kind of stupidity.

“Oh yeah? Sorry, but you are wrong. The serious research that has been done on this subject overwhelmingly supports the idea that unions are associated with more productivity, not the opposite.”

Kathy,

I am genuinely baffled how you can interpret the existing evidence as “overwhelmingly supportive” of a positive productivity effect. I am sure you know Barry Hirsch’s recent review of the literature in the Journal of Labor Research. AFAIR he summarizes the average effect of unions on productivity as pretty much zero, and negative on investment and growth. I have met Barry Hirsch at a few conferences, and he is about as pro-union as on can get, so he cannot be easily dismissed as being biased against unions.

The main reason why I would describe the empirical evidence as ambiguous is that nobody has come up with a good instrument for unionization. Without one, we are looking at a correlation and have no idea what’s driving it. The fact that you want to give it a causal interpretation is really more a statement about your priors than anything else. Given my own priors, I would be more inclined to interpret a positive correlation between unions and productivity as caused by high productivity creating the space for unions to thrive.

# 20:
Let me see if I can get this straight.

Many Detroit industries were/are unionized.
Many Detroit industries fell on hard times.
Therefore, Socrates is mortal.

Is that how this works???

From the aforementioned Hirsch article:

“A particularly rich data set has been developed recently by Black and Lynch (2002). They estimate
production functions for a large sample of U.S. manufacturing plants over the period 1987-1993. Their study focuses on the effects of various workplace practices, information technology, and management procedures, but union status is also measured and analyzed. Absent interaction terms, Black and Lynch find slightly lower productivity in unionized plants following inclusion of detailed controls, a result equivalent to that in
the Clark and Hirsch studies. The authors, however, find that this result is driven by low productivity among unionized plants using traditional management systems. Unionized plants that adopt human resource practices involving joint decision making (i.e., total quality management or TQM) and incentive-based compensation (i.e., profit sharing for nonmanagerial employees) are found to be more productive than their nonunion counterparts, which in turn had higher productivity than union plants using traditional labor management relations (Black and Lynch, 2002). These results reinforce the conclusion that union effects are not a given, but depend highly on the specific economic and labor relations environment in which unions
operate. Although one is reluctant to put too much emphasis on these specific results, they comport well with our priors. The suggestion is that union plants with high-performance systems, presumably adopted with union agreement, can realize enhanced productivity, whereas traditional top-down managed union plants realize no such enhancement. Such research reinforces the need to get inside the union black box, helping us understand why there is high variation in performance across different unionized settings.”

rent seeking

What exactly does this mean here? For instance, this account (by an actual, if perhaps obscure, economics professor) describes rent seeking as “seek[ing] to have value transferred to [oneself] without providing anything in return”; but this seems like mere invective and also doesn’t apply to the unions — if the unions are a separate party from the workers, then they provide something valuable to the workers, and if they aren’t, then they provide something valuable to the employer (namely, the workers’ labor). Furthermore, the Wikipedia article says that a paradigmatic form of rent seeking is manipulating the regulatory environment; but you seem to be suggesting that the unions should be manipulating the regulatory environment by promoting labor law beneficial to all workers (I agree).

Sorry to jump on you, but this has bugged me for a while about the concept of “rent seeking”; and I see that some guy cited in the Wikipedia article claims (p. 133) that whether you consider unions to be rent-seekers depends on whether you think that their net effects are positive or negative, which doesn’t make rent seeking seem like a very fruitful way of analyzing their role.

(And, as you can tell from my citations, I’m no economist, so I would appreciate a lay explanation of the concept that doesn’t boil down to “economic/governmental activity that has a negative effect.”)

Kathy, I needn’t cite any articles to understand that you’re a moron.

Andrew, that research isn’t serious, and in any case, the overwhelming weight of the evidence goes the other way (just ask Kathy), and though I’m sure she thanks you for bringing this isolated case to her attention (though she’s familiar with the literature, she’s never seen it before, which is appropriate, because it isn’t serious and goes against the overwhelming weight of the literature, in which all the serious work speaks with a single voice), it doesn’t change anything (how could it?).

Thomas, did you actually read the passage Andrew cited? It supports Kathy’s argument, rather than contradicting it (as you seem to believe). Black and Lynch find that when you compare companies that use forward-thinking human-resources strategies like joint decision-making and incentive-based compensation (like the kinds of strategies Toyota uses), unionized firms are more productive than non-unionized firms.

Did you get that? They find unionized firms are more productive than non-unionized firms. Now, how is it that you misread the passage. Do you think it’s possible your blatant ideological bias led you to think it said what you hoped it said?

“It supports Kathy’s argument, rather than contradicting it (as you seem to believe).”

Well, I have no dog in this race and I’m just reading the passage that was put into comments, but I don’t think it supports Kathy’s argument.

Kathy said: “The best research has found that unionized firms are, on average, more productive than their nonunionized counterparts.”

I do think commenterlein’s point about correlation and causation is (as usual) pertinent.

Could be wrong about this, of course, no expert at all in this.

The comment said: “Black and Lynch find slightly lower productivity in unionized plants following inclusion of detailed controls, a result equivalent to that in
the Clark and Hirsch studies.”

Maybe Black and Lynch and Clark and Hirsch are not “the best research”? Otherwise the two quotes seem in contradiction.

Again quoting from the comment: “Unionized plants that adopt human resource practices involving joint decision making (i.e., total quality management or TQM) and incentive-based compensation (i.e., profit sharing for nonmanagerial employees) are found to be more productive than their nonunion counterparts…” Since I’m not familiar with the research, I’m not sure about the intent of the word “counterparts.” But it sounds like on a subset of workplaces – those with certain human resource practices – unionized plants are more productive than non-unionized ones. This would apparently include Toyota, the case that Kathy was considering (although Toyota is non-unionized in America, and I imagine (?) that the study is just American-based). But I believe Kathy never qualified her claims to her subset, and her arguments do seem to be intended to apply to the entire set rather than the subset.

I would think unionization would be associated with the introduction of the formal definition of processes that can be improved. I’m not familiar with literature about unionization, but I have read some claims about six sigma, Statistical Process Control, process improvement, etc. in my day job’s field.

As why managers would oppose productivity improvements – that’s obvious and has been answered above. For your amusement, I put up a story on my blog, which I doubt is atypical of the literature on Taylorism, scientific management, TQM, etc.

I note that commenterlein and thomas, despite being ever so sure that they are right and Kathy is wrong have yet to link to anything to support their ever-so-right view point.

I love the way people like to split the world into two places. It is entirely possible – and would appear to be the case – that some union shops are more efficient than some non-union shops and some union shops are less efficient that some non-union shops. My feeling is that to understand why, you need to look at the internal culture within a company to understand why. The issue in Toyota is clearly laid out. Innovation from everyone is valued. In a lot of other companies, it is only valued insofaras someone on the management structure can get credit for it. I would venture to suggest – not from my experience in reading the literature but from actually having to work in a lot of different companies – that the management culture has a lot more to do with how things are done. If you work in a company with a heavy blame culture, there is less time for innovation when everyone is working on covering their asses. If you work in a company with a heavy blame culture, then no one is going to want to do battle with the structures to get something new through the tumbleweed on the grounds that if it doesn’t work, they are screwed.

But it’s much easier to blame the on-the-ground workers than look at management cultures, isn’t it?

If I were a rich right-winger, it’d be heartening to see so many people, *on their own dime*, bash unions (with the exception of Tim Worstall, of course, who’s a paid wh*re). It used to be that one had to pay goons and liars; now they are foolish enough to work for free.

If you pay attention and look around to your job (in most cases), it’s pretty easy to see situations where productivity and quality improvements are left on the table in order to satisfy personal management goals.

A good example is in a sales team making unrealistic claims that the support team now has to deal with. Both are in separate departments, the sales team is making more sales, so they look good, while support costs have gone up, so they look bad. End result, the sales team looks better than the support team, however in reality the sales team caused the problem. Most management structures are completely unable to discern this. It doesn’t show on the bottom line, in black and white, it doesn’t exist.

A higher level opening opens up, the sales team head gets the promotion, and it shows that this stuff works.

The modern corporate structure shouldn’t been seen from an external point of view…that is, in terms of returns to shareholders, they should be watched from an inside point of view, in terms of competition between internal departments. It’s a much better model for analyzing and predicting corporate behavior.

“Tim, in your scenario, that labour that is more productive would be the union labour? Are you sure that that contradicts Kathy?”

Contradicts Kathy? No, just rearranges the possible causation that’s all.

“with the exception of Tim Worstall, of course, who’s a paid wh*re”

And hello to you too Barry.

Unions had their honored place in the rise of workers rights, safe working conditions, fair wages and benefits packages. I suspect that they will again , in those third world nations experiencing the offshoring phenomenon that is employing their citizens and wrecking their environments.

Then a funny thing happened; union Presidents began to make as much money as their CEO counterparts, moved into the same neighborhoods , joined the same clubs and found they had much in common with each other and less in common with the rank and file. I speak as a many year member of some large unions, currently IBEW, in the past the Teamsters, SEIU and the TWU.

The second phenomenon that has altered the picture for the workers is the rise of what I would portray as twenty first century pirates; CEO’s who join large firms, make huge profits in the form of stock options and enormous bonusses, and then ride off into the night with their undeserved and unearned wealth after a period that averages about seven years. They leave behind much wreckage and a less secure position for the workers who remain.

Capitalism, aint it grand?!?

I work in a unionized manufacturing plant – I am an engineer, not in the line management, so I don’t get directly involved in negotiations, grievances, etc, but I have some exposure to those things. I would say that on the question of productivity, it depends.

I think for a union, the best negotiating environment is when the business is profitable and expanding – it is easier for the management to give larger raises or better benefits when profits are good, and the unions obviously have more leverage in threatening to strike a highly profitable plant than a barely profitable one.
In a growing business, its easy for the union to endorse and assist in productivity related investments etc as long as the productivity leads to plus production not reduced employment.

In a declining industry, like the American auto industry, the unions have negotiated to preserve jobs at all costs – to the point of workers getting paid for showing up specifically to sit in a big hall and not work. In those situations, the unions are obviously hurting productivity, and it leads to a death spiral for those companies.

A totally different situation is the construction industry – where the union members are organized by craft, hired by the job, and have a relationship with the union not any company. The unions in some ways benefit productivity – for example by providing training. In that environment competition between unions on who is allowed to do what task can lead to very inefficient, sometimes even absurd, work practices.

dbr

Are we talking about productivity here, i.e. the output per input? It is certainly possible that the output per input of unionized worker is higher, but that firms with non-unionized workers are more profitable than firms with unionized workers. (In fact, I would expect this.) Firms are not in the business of maximizing productivity; they are in the business of maximizing profits.

Walt, that’s a point. When Kathy is measuring productivity, is she measuring productivity per unit of labour? Or per unit of money spent on purchasing labour? The latter is what a company is interested in.
Entirely possible (possibly though, not necessarily true) that the higher per worker productivity of union labour is offset by a lower per dollar productivity of labour, given the higher wages.

“However, it seems entirely disingenuous to call commenterlein out for not linking to supporting research when (s)he did in fact provide a reference, and andrew subsequently linked to it.”

Entirely disingenuous? Ouch. No, I just missed that. Still, it is lazy at best to claim that someone (Kathy) has not provided evidence for her claims when she has put in several links and in response provide a reference that someone else then has to look for.

‘A non-unionized workforce provides a significant competitive advantage in the U.S.’

Er….I’m not an expert on this, but was Kathy’s initial point not that this is not, in fact, correct (over the long term).

Related anecdote:

A few month ago, I had a plumber come out to do some work and I asked him if he was union. He told me he wasn’t and that he could make a lot more money working non-union. It turns out that he’s not just a plumber, he’s a salesman. He told me that he gets a commission on everything he sells when he’s on a job. If he comes to fix a leaky faucet and sell you a new one, he gets a commission on it. He told me he makes over $100,000/year.

Brilliant business model!

“When disagreements arise, however, I would think litigation over regulation would be more expensive than union arbitrage, but I’ve never really studied it.”

Tom Geoghegan demonstrates precisely this point to devesating effectiveness in his most recent book, “See You in Court.” It’s one of the ways in which the decline in union density hurts everyone, or at least anyone who buys a product or service.

http://www.amazon.com/See-You-Court-America-Lawsuit/dp/1595580999/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1210445429&sr=1-1

“When Kathy is measuring productivity, is she measuring productivity per unit of labour? Or per unit of money spent on purchasing labour? The latter is what a company is interested in.

But isn’t the former what society should be interested in? This seems to suggest (as Kathy points out above) one reason why firms resist unionization; but it also suggests that society at large should encourage unionization, as improving total social product (or something like that) even if it redistributes more of it from company owners to workers.”

Not hugely convinced that that is what society should be interested in, no*. Society (and as Barry says, as an eeevil right winger** perhaps I’m not allowed to talk of such) might want to pay attention to total factor productivity…how can we make the most, have the highest consumption, from what we have in terms of technology, labour and capital, OK, yes. But to insist that labour productivity is the only important one of these is to say that labour is the only constraint we face.

As above with the glazier, we can increase labour productivity by allowing it to access more capital: but is that the best use of the capital available?

Total wealth is increased by an increase in TFP, not LabourFP.

* What society should be interested in is the maintenance and increase of liberty. Economics, productivity, are a side show.

** I’m a classical liberal, if that helps.

Er….I’m not an expert on this, but was Kathy’s initial point not that this is not, in fact, correct (over the long term).

Well it certainly has been true in the U.S. auto industry over the period that the Japanese and European manufacturers have had factories here. It’s been true long enough to bring the unionized automakers (and even more so, the unionized suppliers) into or near bankruptcy.

…even if it redistributes more of it from company owners to workers.

That’s the big myth. What it really does is redistribute money from consumers to unionized workers with company management as the middle men (just as the tobacco settlement wasn’t paid for by company owners, it was paid for by smokers in the form of much higher cigarette prices).

Ford, GM, and Chrysler made lots of money when the UAW was at its zenith and the UAW had a monopoly on auto labor. The UAW charged far above market rates for unskilled labor, but the Big 3 just turned around and charged the costs off to their customers, who had no choice but to pay.

This cozy arrangement (for the Big 3 and the UAW — but not consumers) began to unravel when the Japanese starting importing en masse in the 70’s and 80’s and totally came apart when they established their non-union American manufacturing plants (which created a constituency of workers who depended on the Japanese companies and made it impossible for tariffs to protect the Big 3 and UAW from competition.

Tim — your argument may cast doubt on the idea that society should care about LaborFP, but it doesn’t seem to me to support the idea that society should care at all lowering the unit cost of labor to companies, either. Does it?

agm, ditto; business people may go into business to make money, but I don’t see why it’s my job to help them make as much of it as possible, or why my government’s policies should be oriented to that goal. We could just as well say that workers go to work to make money, and if unionization increases wages, then there’s no reason for workers not to favor it.

slocum, if the higher wages that union workers make are entirely passed on to the consumers, then why are the firms less profitable? Do you have any data backing up the idea that 100% of the union wage premium is passed on to consumers?

‘Well it certainly has been true in the U.S. auto industry over the period that the Japanese and European manufacturers have had factories here. It’s been true long enough to bring the unionized automakers (and even more so, the unionized suppliers) into or near bankruptcy.’

OK I know I shouldn’t but I will. Evidence please.

Commenterlein,

Management’s desire to feather its own nest isn’t necessarily conducive to maximizing productivity. After all, slave labor is about as unproductive as you can get, so why didn’t the planters set them free and pay wages instead?

Total management remunerations in a highly productive enterprise with empowered workers might well be less than their much larger slice of a smaller pie under the existing system. By definition, privilege reduces overall efficiency by interfering with incentives to productivity, but it also increases the material well-being of the privileged compared to what it would be without privilege.

“Tim—your argument may cast doubt on the idea that society should care about LaborFP, but it doesn’t seem to me to support the idea that society should care at all lowering the unit cost of labor to companies, either. Does it?”

Lowering unit labour costs….in the form of interfering with the freedom of association of the labour? No, I don’t think that is something society should do but for non-economic reasons. Freedom of association is one of those rights which go to make up a free society and are thus, in my perhaps skewed view of the world, non-negotiable.

On the other hand we’re also not all that happy with the idea that such association can become a monopoly, one that can then (as above with the UAW perhaps) extract rents from the consumers. So there are times when as a society me might want to intervene, just as we would with a business setting up a mono- or oligopo- listic combine.

But it’s not “lowering the cost of labour” which is the driving force in either: it’s the play between association and the risks of monopoly.

On the gripping hand it’s Sunday morning where I am so perhaps my logic isn’t all that compelling.

Tim, now it’s Sunday morning where I am so I’m not necessarily thinking clearly (for instance, the first time I read your comment entirely backward), but at this point the argument basically comes down to the question of who’s extracting rents from who, doesn’t it? — which I conveniently already complained about in comment 27. I was looking at one of the Hirsch articles Andrew cited and AFAICT when he says unions “seek rents” what he means is that they try to get higher salaries and better conditions for their workers, which seems no different from anything anyone tries to do in bargaining; it’s just that collective bargaining brings workers closer to an equal footing with a large employer.

I suppose the argument here is that the labor laws can give the workers a monopoly on work at that particular site — the employer can’t hire anyone except through the union (or, in open shops, under the terms negotiated by the union) — and that that creates an inefficiency. But the employer also (necessarily) has a monopsony over buying work at that particular site, so I’m not sure why the prospect of the union gaining a monopoly would be uniquely bad.

If the argument is that government ought to be wary of making unionization easier because of the danger of rent-seeking, then I think we’re back to the question we started with: Is the overall impact of unions good for society or bad for society? Even if unions decrease profit margins, that doesn’t mean they’re bad for society as a whole, especially if they do increase LaborFP and possibly TotalFP. The argument that unions promote rent-seeking and are thus bad seems appealing from a certain theoretical perspective, but I’m not sure it holds up in the real world, where the monopsony model may describe the labor market better than perfect competition models.

I apologize for the strike-through in the previous post, I have no idea how I did that.

I apologize for the strike-through in the previous post, I have no idea how I did that.

Textile markup treats dashes around text as a sign that it should strike the text through. I think Textile markup may also be what made the preview useless. O Blog Overlords, is it not time to get rid of Textile markup?

Because unions give workers a voice, unionized workers have lower quit rates than their nonunion counterparts.

Unsupported assertion. The fact that workers have a voice may contribute to lower quit rates, but other factors include higher wages, better conditions (including restrictive work practices that ease expectations on workers), and the protection of incompetent, inefficient, lazy, or insubordinate workers who know they would fare poorly on the job market but who enjoy security through their union. None of these factors tend to improve efficiency. Moreover, turnover costs trade off against factors such as burnout, inflexibility in changing business environments, uneconomic pay rates due to seniority or other factors not directly related to performance, and opportunity costs.