Union ‘Moats’ Further Eroded by Technology Workers

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Union 'Moats' Further Eroded by Technology Workers

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

About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.