Labor Pains: The UAW Tests The Auto Maker’s Limits

>> Tom Church: This is the Libertarian Podcast from the Hoover Institution. Today we're talking about labor strikes across the United States. I'm your host, Tom Church. And the libertarian is Professor Richard Epstein. Richard is the Peter and Kiersten Bedford senior fellow here at the Hoover Institution. He's the Lawrence A Tisch professor of law at NYU and is a senior lecturer at the University of Chicago.

Now, Richard, today I'd like to talk about the UAW strike, partly because as a person who grew up in Michigan, I was never far away from issues surrounding automakers, but also because you did write a column on it, and there are a few things I want to get into with you.

>> Richard Epstein: Okay.

>> Tom Church: So, Richard, first thing, let's actually talk about the demands here. And who are we talking about here? We're talking about the UAW. It represents 150,000 workers. There are 13,000 selectively striking across 3 automakers, 4 GM Stellantis in Michigan, Ohio, and Missouri. So they're demanding things like pay that would work out for a four-day workweek.

They have a tiered system right now for pay where younger workers aren't paid as much as perhaps the older ones. And then the one that I really want to get in with you on as we go through this is higher pay. They're asking for a 40% pay increase over four and a half years, and the automakers are, well, not willing to offer that right now.

So take me through this strike here. We just started, it's selective. It's not completely in motion just yet. What's the likelihood that the UAW gets the auto companies to agree to it?

>> Richard Epstein: Well, I don't think they will be able to do it, but I think it's important to go very far back.

They've got themselves a very radical new leadership, right? And when you start having new leadership, which is very aggressive, what they try to do is to make demands that are very strong. This has already happened, if you recall, with respect to the situation back in 1979 when the unions were extremely powerful and they managed to negotiate a contract which allowed workers who were laid off to receive their full wages by simply going into a rubber room and shooting darts or something like that for the business day.

By that time, the automakers at General Motors had 500,000 workers, which is more than the total UAW membership today on every industry. And it shrunk by about 90% before they abandoned this scheme. They are trying to do the same kind of thing. Their attitude is we look at the profits that are made on the other side.

And what those do is they aid to a quarter of a trillion dollars in money over the last 13 years. And then what they say is they're going to make very large profits this particular year. And so what happens is we want some part of the lolly and the question is, will they be able to get it by holding out?

Well, here's the bottom line. The first principle that one has to deal with when you're working about unions under these circumstances, a very simple one is those side can require any other side that they make concessions about what is happening. The world does not work that way. What you can do is you can pull out on strike, you can lock out, but what you cannot do is force somebody to enter into a deal, no matter what that deal is about.

Well, this is a very important situation because what happens is if the offer that they make is worse for the companies than it is by just sending patent, doing nothing and perhaps eventually harming that dreaded word scabs, they're not going to be able to do it. So to put it in a simple fashion, suppose what they said is, look, before we start this negotiation, you see that large amount of surplus that you have in your company, just give us $10 million straight out, a billion dollars straight out, and then we can start talking.

But they're not gonna get the 10 billion straight out. So they're trying to bundle it into the wage packages that they can receive and the other benefits that they could receive through negotiations. But the absolute bottom line is they can reduce the profits below what they would be and still leave the companies better off than before.

But if the offer that they make makes the companies better off bankrupt or better off using scabs, they're not going to take it. And that's what the situation turns out to be here. So the question is, how do I know all of this stuff? It's not because I'm a seer.

It's because if you start looking at the way the industry has organized itself, the decline in union wages is matched by a decline in wages for similar workers in the non-union sector. That is the exact same thing has happened since 2008, and that's a competitive market. So what they're telling you, in effect, is the services are not as valuable as they were before, even though you're automakers.

Because you start looking at production mechanization, improved computers, better quality control and all that stuff, essentially probably reduces the level of sophistication that you need to work on the line. And as the sophistication goes down, you're willing to hire a class of workers that have a little bit less training, skill and intelligence or whatever mattered.

And they will take those particular jobs because they'd rather have a job at the union less than a fancy worker makes, which is more than they could get at some alternative employment. So the fixed star in this particular situation is there's no indicator anywhere in the market that the real value of these workers to the firms has increased anywhere in the auto industry.

And so that's what explains the depression in the prices. And there's nothing about bargaining strategy which can make workers more productive.

>> Tom Church: Can I ask one more econ question? Because one of the arguments, right, is that the CEO's of these auto companies have made incredible increases in pay and of course in the tens of millions of dollars, whereas total pay has gone up a couple percent as opposed to maybe 40% or so for the CEO.

And so why is it, take me through, why is it that workers aren't seeing the same sorts of returns, shouldn't or just don't get to see the same sorts of returns that a CEO or upper management might?

>> Richard Epstein: Well, I've already indicated to you that the work that they supply is not the same work that they supplied 15 years ago.

Same thing is true on the CEO side. I said if you start looking at CEO wages and compare public versus non-public corporations, it turns out that the wage skew towards the CEO is even greater in the private corporations than it is in the public corporation. So what is it?

Well, there are a lot of reasons that start to explain this. None of them are entirely persuasive, but none of them are irrelevant. Well, the first thing you want to know is being a CEO is a very difficult, exhausting 24/7 job. And so you have to ask whether or not the tenure of a CEO is as long now as it's been?

In some cases, like with Mary Barrett, it's certainly been that, but in other cases, not. But in expectations, if you think that the term of office is going to be shorter, then the wage bump that you have to give is gonna be higher. Secondly, it turns out that you have to space wages.

And so if you say reduce the CEO's level down to say $10 million, a very nice salary and so forth, what's going to happen is how are you going to pay the people underneath that person? When the competitive market says that for chief of marketing, you may need $14 million today, and for chief of technical support services, cyberspace, you need all figures out of eight figures or more.

You can have a situation where the CEO gets a lower pay than the key people who start to report to him. And so that forces the number up. Then when you try to figure out just how big is this number, law partners, I'm sorry to say, amazed to say, many of them earn in the $25 million ratio.

Senior partners in major law firms seem to get that kind of money. Because of their ability to attract clients and the ability to solve problems which are, of course, ten times the amount of the salary that they get. So you take a CEO, one of these major companies, they've got this strike to negotiate.

They've got all sorts of complicated situations to do with respect to electrical cars, global warming, international trade and so forth. It takes a much more sophisticated person to do that, and as that happens, the supply dwindles and so the wages to bid them up are going to be higher.

The question you'd have to ask is, suppose you decided to cut the CEO in half and it had no impact on the corporation. Why would the corporation, if it's paying a competitive wage or a monopolistic wage, given the union structure, but no more, decide to raise the offer as opposed to giving the money back to its shareholders.

In which point then their profit sharing plans and everything else go up. And so, the simplest kind of explanation is that we do have a market, in which in terms of the value to a company, a CEO is indeed worth 362 line workers. A line worker could ruin a car, the CEO can destroy everything that's associated with the particular firm.

That's how important these kinds of decisions are. And as we have more complex environments, the level of uncertainty goes up. And as uncertainty goes up, wages go up, because essentially what they're paying people to do is to solve problems. So look at it this way, a good CEO saves the corporation $10 billion a year, so what's he getting?

He's getting a 1% wage, right, against that particular measure. And so they're just not comparable structures, and it's a strong populist motion. And what's happened is, this guy Sean Fein is essentially somebody who believes his own rhetoric, and he's backed, of course, by the president of the United States and the whole left wing movement.

For which wage parity is the dominant situation rather than an efficient wage structure.

>> Tom Church: I'd like to know, Richard, what you think about President Biden weighing in on this strike? And I should mention, okay, president Biden has expressed complete support for the UAW, I suppose, to no one's surprise.

I guess I wanna also ask, there's been a bit of a resurgence in terms of, I wanna call it economic nativism on the right as well. I can imagine there are some Republicans, maybe, who have auto workers in their districts, who are supporting labor and workers now. And I'd like to know, is the US government, do you think, ever gonna get involved in this sort of strike?

I mean, are there NLRB issues that are gonna come to a head, or is this just gonna be a private arrangement between the union and the auto workers?

>> Richard Epstein: Well, let's start with the last point. In order for the NLRB to get involved, what you have to do is to show that there's some unfair labor practice that has taken place.

And in a strictly economic strike, where essentially we want more money and you want to pay less money, you don't see the hook on which you could put that. And the way in which Sean Fain has put his particular case, rich against poor and so forth. There's no hint whatsoever of an unfair labor practice, refusal to bargain, an effort to pressure workers in some illicit fashion, some phony election.

So they're not gonna be able to raise that. And therefore the NLRB, I don't think, is going to be very much involved. Now, you said, in effect, Biden has supported the workers, what you meant or should have said is, he has basically giving them verbal support while sticking a knife in their back.

And the knife is in the form of electronic vehicle. We know generally speaking, that electronic vehicles are much less costly to make than are others. Which means, in effect, that most of the value in those things comes in the form of intellectual property or other kinds of collateral benefit.

Well, what happens is the labor unions have spoken out very strongly and they're trying to get rid of the subsidies associated with EV's. And to some extent, they wouldn't even care if you basically try to suppress their operation altogether, by other kinds of means including illicit taxes on it.

The Biden administration is extremely pro labor, but it's gone absolutely over the top with respect to its definition of a climate crisis. Which it thinks requires immediate action, including the suppression of any and all development with respect to fossil fuels in the automotive space or the transportation space.

So the unions, the UAW, has refused to endorse Biden up to this particular point, because they see that he's as big a threat to them as is, in fact, management. So now you put the pieces together and this is what you discover. The EV motion movement is a threat also to manufacturers, it's very clear that if you look at the numbers, even if you can make a car with a huge subsidy, you are still losing money with respect to that vehicle.

So the electronic car business notwithstanding the subsidy is, at least for these major automakers, a loss. The only way they can make that up is to put these huge gas clusters in with fossil fuels, and that's, of course, labor intensive. That's where the workers are going to caught to come.

So the thing to understand about this is, the EV push is something that hurts management every bit as it does to labor. What it does is a huge, giant lean over the productive assets of any firm, and it reduces the total size of the surplus. So the only thing to bargain over is how you divide that loss between the two sides.

Well, you're not gonna get huge wage increases in a world in which it turns out that the overall profitability of the firm is going to be hurt very badly, by the kind of regulation that takes place. So they're in a very hard place, but it's not the management that's doing it to them, management is every bit as much of a victim as it is under these circumstances.

And what makes it worse is that, there are some companies like Tesla, which seem to have a real lead in this particular space, and even one way or another, are gonna do better in production than these guys. So no matter what the situation is, they have to lose out to that.

There is also a very large non union sector of foreign companies, like the German companies and the Japanese companies that come in and they locate in right to work states, and they don't have unions. The UAW has been uniformly unsuccessful in getting these characters to organize, because what they met is the following argument.

Sure, the union guys may get an advantage as much as 30 or 40, this thing goes through $50 an hour, OBU, but I want you to look north and ask the following question. How many of these plants are still in operation relative to the number that they had ten years ago?

You're allowed to make purely descriptive arguments, you're not allowed to make threats. And so all the grammarians who work for the manufacturers know how to state the point as a simple observation. And it turns out that if you start looking at this stuff, there are two companies shut down, they have to consolidate their lines.

There are huge fights amongst workers as to how you organize seniority by days in the industry, days at the particular firm, and so forth. And they are hurting, and they're gonna continue to hurt because they are basically hurting both markets. They cant make a profit in the EV market, and they're being beaten to pulse by foreign manufacturers, who now locate domestically and aren't burdened by a union structure.

They are not in a very strong position. And the management side, they know this, and the reason they're not gonna concede the wages, is they dont think that there's any way that they can manipulate price of product in a way which will allow them to recoup this. So back to the first point, you have to get the union to tell or to figure out how they can get the management to believe that they're better off capitulating to a deal than taking a strike.

And so far, they have not done this. So this could go on a very long time, but in the end, if you look at the size of the union strike fund, it's about $825 million. You try to figure out how long that's going to last. It may last a month.

It may last two months. But in the end, I think these workers are hurting more. And if management ever starts to bring in a replacement workers, which they will be allowed to do, this could turn very ugly very fast.

>> Tom Church: Last one for you, Richard. It's 2023, it's not 1973, it's not 1953.

We're down to 6% of the private workforce is unionized. About a third of the public sector is unionized, and so that's there. But there's this resurgence. Unions have a higher approval rating now than they've had in the last few decades. So, one, what do you think we can attribute to that?

And two, let's look out 50 years. We know what the last 50 years look like. What do the next 50 years look like? Do you think a growing government means more public sector workers and so more unions? Or are we just still on a slow downward trend?

>> Richard Epstein: Well, it's clear, let's go back to the first thing.

There's no doubt there's this very strong progressive tide in the United States, which deals with such issues as climate change, racial injustice, union workers, and all of that. And you can get large numbers of people in the public to be in favor of that. But again, the same condition applies.

You cannot force an employer to make a concession because large numbers of the people in the public want them to do so. So you start organized places like Starbucks and McDonald. And what you discover, and this, the labor unions fully understand, is that the bargaining unit is the particular outlet which is owned by some private franchisee.

And this is a very tough hombre, and he will not basically yield to wage demands that he can't possibly meet. And so what will happen if they push too hard on them, they'll shut this Starbucks down, that McDonald's down, and you have to go four blocks away in order to go somewhere else.

So what you're doing is popular sentiment is one thing, but bargaining strength that you have in particular locations turns out to be quite another thing. And the reason why it is that the numbers have gone down so radically in the private space is that when you take into account as an individual worker.

The cost of unionization, that is, the dues that you have to pay, the work that you have to do. The fragility of the job, given the fact that you may be closed down and have to face a long stride as against a situation in which you could get a steadier rate of return at a lower rate, but with much less risk.

Most workers essentially will choose the second package over the first package because they've seen what's happening. One of the reasons that you do this is it goes back a long time. When I first started teaching labor law, there was a case called Gissel, very important case. And they had to do with the kinds of threats that management could or could not make that created unfair labor practices.

And so one of my students looked up to me and said, here we are in the Supreme Court in the Gissel case, and it turns out, what's it stake is a bargaining unit with 23 people. Suppose you win that case and get another election, it's 23 people. Now at the same time they're closing down a plant and they're idling 3,500 people.

Well, you try to figure out what the rate of reorganization is going to be relative to the rate of natural decline because of closure, and you just can't make up the differences unless you can keep these large firms. But large firms basically break themselves into small firms. They're much more sophisticated in the way in which they organize their business model.

I remember speaking to one of my former students, and she was a sophisticated management lawyer. She says, when do we first get involved in a case? Plant location, when's the second time we get involved in a place? Architecture, design, and so forth. Every single thing that you do as a management firm always has a union aspect to it.

So you never build a plant in a city where it's front door's on a public street, because you can't deal with the picketing risk that is otherwise gonna take place. So you move them to remote locations, you have large amounts of setbacks. You have a heliport propper on the top where you can do kinds of things.

You have three or four ways in which you could get your trucks in and out of the plant. I mean, the whole thing has started to change. Because the one thing that has not changed, you take a survey of management types, regardless of their politics, and ask them how many of these people will welcome a union.

And the answer is 99% against. And the 1% says, yeah, we'll take a union for us, if you have a more powerful union against our major rival. Because what we do is we get a differential impact case that gives us a competitive advantage. But there's nobody who says, all other things being equal, I'd rather be union than non.

On the public side, the number's going down as well, more slowly. But what's happened is these budgets are in fact very difficult to maintain in some cases. A lot of this stuff has to do with really sensitive issues, having to do with the police and having to do with schools and so forth and prison guard.

And many people are now much more active on those issues than they used to be. And when they start to speak out, it really transforms the nature in which these public boards deal, and they become a bit stiffer in the way in which they respond to unionization. The key thing to remember is not what the vote is amongst the people who are for it, who are not participating in the market.

The key thing is to ask is, are the participants persuaded that they're better off because of general popular sentiment, taking a union, better goodwill, and so forth? And the answer to that question is it's a third order consideration. It's not gonna drive this particular case. And union drive after union drive has always faltered on this particular problem.

What happens today is the cost of monopolization to the firm is greater given the fact that the industries are more uniformly more competitive. The costs of the workers are higher because of the instability of the job and the cost of maintaining it. So unions get less benefit at more cost.

And sooner or later, when those lines cross, what happens is you see the union movement start to disintegrate at the edges or to contract. And that's what's gonna continue to happen, notwithstanding the popular sentiment, not even withstanding what it is that Biden's gonna do. He is capable of ruining firms.

He is not capable of strengthening unions.

>> Tom Church: You've been listening to the Libertarian Podcast with Richard Epstein. As always, you can learn more if you head over to Richard's column, The Libertarian, which we publish at Defining Ideas at hoover.org. If you found this conversation thought provoking, please share it with your friends and rate the show on Apple Podcasts, Spotify, or wherever you're tuning in.

For Richard Epstein, I'm Tom Church, we'll talk to you next time.

>> Jenn Henry: This podcast is a production of the Hoover institution, where we generate and promote ideas advancing freedom. For more information about our work, to hear more of our podcasts or view our video content, please visit hoover.org.