Germany unions

Unions create inefficiency.  This creates an opportunity for new technologies that perform the same function, but aren’t as labor-intensive.  (E.g. integrated steel vs. mini-mills)

Unions were a useful force in the US in their early days.  They helped get safe working conditions, and helped workers get the Sabbath off, so that they could go to church.  Those were admirable goals, but after that, they outlived their usefulness.

Unions restricted my father and uncle on whom they could hire, yet required them to be a part of them, but gave them no vote because they were owners (they hired one worker at most).  My mother was particularly annoyed at them, but today she draws a pension from it.

The main inefficiency of unions comes from work rules.  In most other ways, unionized workers are not inefficient.  But the inefficiency of unions attracts efforts from employers to substitute capital for labor.  One of the best examples is listed above — unionized steel gets its market share eroded by mini-mills, using a lot more science, fewer people, and producing steel a lot cheaper.

There are other examples of this, but if in the private sector attempts to raise wages above levels justified by productivity, or limit flexibility of work processes, there will be the tendency for non-union firms to come in and take market share.  Example: non-union auto parts companies now provide most of the parts to auto manufacturers.

This is one reason why I think non-union technology has been more harmful to unions than foreign competition.  Creativity is not union, by and large, though I know there are exceptions.  In an era of technological improvement, non-union firms have more quickly embraced change.  This is what has hollowed out the unions, leaving them largely to serve governments, where technological improvement plays little role, because there is no possibility of competition in government, mostly.

Yes, there may be modest changes here and there, but when was the last time you heard of a municipality breaking a police, fireman, or teachers’  union?  Until pensions break the states and municipalities, that will not happen.

Thus I expect unions to continue to decrease in power for the near term, aside from government employment.  Unions will always occupy the most backward parts of the economy.

By David Merkel, CFA of Aleph Blog