Unions (and Workers) Need a New Business Model

Political battles in Wisconsin and elsewhere have recently given union leaders hope for a revival.  Large crowds have turned out to demonstrate against Republican proposals to cut the incomes and/or jobs of public sector workers and limit their collective bargaining rights.   And although unions have suffered during the last decades, their leaders maintain grand ambitions.  Yet the recent rise in hopes is likely to be dashed against political and economic reality.  Despite whatever public support and member enthusiasm they generate, unions still adhere to a paradigm that cannot compete in an increasingly competitive, fluid, and globalized world.

The traditional union business model is built on two premises that no longer work over the long-term in today’s economy.  The first is the all-or-nothing approach to organizing each bargaining unit.  There is something fundamentally wrong with any private group being able to force an individual to belong to it simply because a majority of his co-workers vote to join.  Although unions have viewed the rule as necessary in order to force members to pay dues and follow union decisions, it has actually hurt them in two ways.  The first is that it excludes workers who would like to join a union but cannot convince a majority of their peers to agree.  As elections become more difficult to win this group grows.  Of course, the traditional model has nothing to offer these workers since unions believe all their power comes from the right to bargain as the exclusive representative of workers.  The coercive membership model also hurts unions in the same way that lack of choice hurts tends to hurt any organization: it makes them less responsive to their members and therefore less willing to adapt as the needs of those members change.

The second false premise is that unions typically see their role as bargaining for labor to get a bigger share of the surplus between the cost of production and the value that the consumer attaches to a good or service.  Each product costs something in terms of capital, labor, land, and other inputs.  No business can survive long if consumers are not willing to pay for at least these costs.  Typically they are willing to pay more, often much more.  This surplus gets divided up between companies (higher profits), workers (higher wages), and consumers (lower prices than they would be willing to pay).  Workers’ interests are then directly opposed to those of companies and consumers.  The problem is that in an increasingly competitive economy this surplus tends gravitate to consumers because competitors, such as foreign car companies, quickly offer competing products or workers, such as in the Southwest, are willing to work for less.

Like companies, unions must survive in what Joseph Schumpeter called “the perennial gale of creative destruction.”  Schumpeter argued that the central fact of capitalism was competition “from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.  This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff.”

Yet their business model leaves union ill-equipped to make the necessary adaptations.  The traditional model is much better suited for a corporatist economy where markets are dominated by a few large companies facing only slow, incremental change.  In this environment unions can organize most of the industry and then sit down with business and government leaders to decide how much of the market each side gets.  Higher costs can safely be passed on to consumers who have few other choices.  Schumpeter’s competition is not subject to such control.  In a more dynamic world, the sustainable advantage that workers enjoy comes not from a given share of a shrinking producer’s surplus but from increasing labor productivity in the form of higher skills and membership in a more effective business organization.  Yet traditional labor has a difficult time embracing this source of advantage because it inevitably implies that fewer workers are needed in order to produce a given amount of output.  In fact, in traditional industries unions have often insisted on work rules that actually reduce average productivity.

If all-or-nothing membership excludes potential union members and leaves union leadership less responsive to those that are required to join and if the corporatist approach tends to weaken the competitiveness of employers, what would a new business model look like?  First, it would have to be based on voluntary membership by each worker.  Expanding membership would then not depend on winning elections, something unions are having more and more difficulty doing.  Nor would membership be limited to the traditional working class.  All workers, including managers, become potential members.

But why would workers voluntarily join a union?  Presumably because, like other voluntary groups including health clubs, public broadcasting, and the American Automotive Association, the union provided them with a service that was worth the price and that they could not easily get elsewhere.  What might this service be?  Many are possible.  For example, some unions already run health and pension plans.  They could also partner with others to offer health club memberships, life insurance plans, legal advice and other services.  The most likely competitive advantage, however, would come from offering comprehensive career help aimed at helping each member meet their career goals.  Such a service would include career counseling, job training to acquire necessary skills, and job placement.  A union that did this well might even be able to convince employers to use it as an exclusive placement source.  Since turnover and training are both costly to employers, a union that not only did this well but guaranteed the quality of the worker might actually be a welcome development for companies that are having difficulty finding and keeping workers.

The more individualized the advice it gave, the more valuable each worker would find it.  The connection between the union and the worker might then continue throughout the career.  Although vocational training and job placement centers already exist, they typically do not seek to form a long-term attachment to the worker and it can therefore be difficult for an individual to tell whether he or she is truly getting quality advice or training that will lead to a job.  Yet because workers are likely to switch employers more often and their skills are likely to become obsolete more quickly, a steady source of career support that they can periodically turn to is likely to have high value.  Add to this services that deliver continuous value and socialization and a stable business model emerges.

If history is any guide, existing unions are likely to drive the old model into the ground rather than adapt.  They would not be the first managers to do so.  Successful new models, when they come, are likely to emerge from new organizations challenging the establishment than from the establishment itself.

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