A Tough Environment for Unions

These are tough times for unions, and several trends are evident that are raising alarms in the union movement. For example, some companies are simply putting collective bargaining negotiations on hold and letting current contracts expire. Stewart Saxe, a labour lawyer at Blake & McKenzie LLP, says he hasn't seen anything like this in the 30 years he has been in the business. Sometimes unions agree to put bargaining on hold because they realize that their current contract is probably better than any new one they could negotiate in these tough economic times. Work stoppages and lost work days have dropped sharply in recent years, and this also indicates union weakness, says Larry Savage, an associate professor at Brock University. Employers recognize this and have been able to get unions to agree to multi-year wage freezes. Ken Neumann, who is trying to get a new collective agreement for workers at Vale Inco, says this is the worst bargaining climate he has seen in 30 years.

Unions have always been reluctant to scale back their demands for increases in wages and fringe benefits, but in the current economic climate, failing to do so threatens the very existence of the companies who employ the unionized workers. If a company fails, the workers obviously lose their jobs. An interdependent global economy means that companies in other countries who have more flexible pay and labour conditions are strong competitors of Canadian companies that are inflexible. A report produced by the Ottawa-based Centre for the Study of Living Standards offers the view that unions used to create value for Canadian workers because the Canadian economy was relatively protected and this allowed unions to get a share of company profits for their workers. But now, the report says, unions have less ability to do this in the globally competitive and deregulated environment. So, unions are going to have to accept market conditions or face plant closures which will result in workers losing their jobs. Jim Stafford, the chief economist for the Canadian Auto Workers union (CAW) says that unions actually are interested in having highly productive workers, and they are more flexible than stereotypes suggest. But he agrees that the current market is tough and that wages and pensions are under threat.

On March 11, 2009, the national bargaining committee of the CAW met in the downtown Sheraton Centre Toronto Hotel. The mood was very serious because things were not looking up for the CAW. Although the union has been very successful (some say too successful) in getting wage and fringe benefit increases for its members, auto companies are now saddled with extremely high labour costs as a result. Unionized workers are finding that they can no longer demand ever-increasing wages. In fact, on March 8, the CAW accepted an agreement that froze wages until 2012 because that was a condition for government loans to bail out General Motors.

The federal government and the government of Ontario want the auto companies to drastically reduce labour costs at the auto plants in Oshawa, St. Catharines, and Windsor. Specifically, they want the hourly rates reduced to those paid at non-union Toyota, and they want pension costs reduced as well. That would mean about $19 an hour in wage cuts. The CAW eventually agreed to these cuts, but complains that Ottawa and Ontario are interfering in collective bargaining, and are blackmailing the CAW to sign new agreements. Critics of government bailouts have also weighed in on this issue. They say that the plan won't work, at least not in the long term. Supporters argue that 100,000 jobs will be saved by the bailouts (the money will come from the pockets of Canadian taxpayers), but critics say there is no way that 100,000 jobs can be saved, because there are only 100,000 jobs in the whole industry.

Ken Lewenza, the president of the CAW, says the threats to workers' jobs are unprecedented. The future of employment in the auto industry does not look good, and Lewenza accepts the fact that the auto industry is going to be smaller and employ fewer people. This is particularly true for Ford, GM, and Chrysler (where the CAW is strong). The CAW wants to organize non-union plants, but they haven't had much success to date. There is one piece of good news: in November 2009, GM announced that it was investing $90 million in its Ontario joint venture facility which produces the Chevrolet Equinox and the GMC Terrain. That will mean 150 new jobs for auto workers.

The CAW has also experienced difficulties in its negotiations with Ford Motor Co. On September 8, 2009, negotiators for Ford and the CAW began meeting to discuss ways to cut costs. Ford initiated these talks after the CAW gave concessions to Chrysler and GM which reduced the labour costs at those companies by $19/hour. The CAW made these concessions to Chrysler and GM after receiving assurances that GM and Chrysler would preserve their manufacturing "footprint" in Canada. The CAW wanted Ford to maintain its manufacturing presence in Canada, particularly at the St. Thomas, Ontario plant. But Ford said it had no cars to produce at that plant after 2011 (the plant makes cars like the Ford Crown Victoria and the Mercury Grand Marquis, but those gas guzzlers are no longer popular). Ford threatened to pull out of Canada entirely if the CAW didn't agree to wage and benefits cuts. In October 2009, Ford and the CAW reached a new collective agreement. The St. Thomas assembly plant will close in the third quarter of 2011 (putting 1,500 workers out of a job). As part of the new deal, Ford also agreed to put $2 billion of new investments into its Oakville plant. Ford also agreed to produce 10 percent of its total North American production in Canada (that is down from the current 13%), and agreed that it would produce more cars in Canada than it sells here. Chrysler and GM had earlier agreed to this latter provision for their operations (about 20 percent for each company), but since Ford has received no government funding, they were not required to maintain their Canadian footprint.

The difficult environment for unions is not limited to automobile manufacturing. In June 2009, three unions at Air Canada (AC), which represents about 60 percent of AC's unionized workers, agreed to extend their current labour agreements with no wage increases, and to allow the company to put less money into their pension plans. AC said it simply cannot meet its pension contribution responsibilities (AC has a pension deficit of $2.9 billion). This agreement was reached after AC opened its books to show everyone what bad financial shape it was in. The unions also agreed to a no-strike, no-lockout provision. Air Canada hopes the deal will allow the company to avoid a second bankruptcy filing. As part of the deal, the unions got a 10 percent equity stake in AC. Foreign airlines are also facing difficulties and are taking actions that threaten unions. For example, in October 2009, Aer Lingus, the Irish airline, announced that is was planning to lay off one-fifth of its workers and would cut salaries for those who remain. The airline is doing this in spite of the threat of strikes by unionized employees. British Airways PLC also plans to cut thousands of jobs in spite of strike threats by its unions.

It is not just companies that are causing difficulties for unions. Vocal critics of unions continue to argue that unions are no longer necessary. For example, Harold Levitt says that workers are protected more by government legislation than they are by unions. He also argues that unions raise the cost of operations, and he cites the recent strike of sanitation workers in Toronto, who he says are typical of overpaid, public sector workers who make more than market rates. He points out that their employer (the Canadian taxpayer) is forced to pay union workers higher rates than the taxpayers can earn in the market. The work should be outsourced to lower-cost private sector operators.

Questions for Discussion

1. Explain in your own words how the interdependent, global economy of the 21st century has caused major problems for unionized Canadian automobile manufacturers. Do non-union automobile manufacturers have the same problem?
2. What are the pros and cons of union members having an equity stake in the company they work for?
3. Consider the following statement: Unions have historically been very successful at extracting increased wages and benefits from employers, but this success will be the downfall of unions because the cost structure of Canadian companies has increased to the point where the companies cannot price their products competitively. Once that happens, the companies will go out of business and all the workers will lose their jobs. Do you agree or disagree with the statement? Explain your reasoning.

Sources: Kristine Owram, "GM to Invest $90 Million in Southwestern Ontario Plant," Winnipeg Free Press, November 10, 2009, p. B10; Greg Keenan, "Ford Confirms Plant Closing as GM Invests," The Globe and Mail, November 10, 2009, p. B3; Barry Critchley, "Ford, CAW Reach Deal to Keep 10% Footprint; St. Thomas to Close," National Post, October 31, 2009, p. FP 2; "European Airlines Risk Labour Strikes in Slashing Jobs; Aer Lingus Latest," National Post, October 8, 2009, p. FP18; Greg Keenan, "Ford’s Canadian Labour Costs Under Fire," The Globe and Mail, October 3, 2009, p. B6; "Ford Faces $1.76 Billion Pension Gap," National Post, September 24, 2009, p. FP5; "Ford and CAW in Cost-Cutting Negotiations; Match Chrysler, GM," National Post, September 9, 2009, p. FP5; Thomas Watson, "Why the Plan Won’t Work," Canadian Business, July 20, 2009, p. 11; Tavia Grant, "Downturn Brings New Bargaining Tactic: Do Nothing," The Globe and Mail, July 8, 2009, p. B1; Barrie McKenna, "Anti-Union Lobby Fears 'Armageddon on Capitol Hill'," The Globe and Mail, July 8, 2009, p. B4; Howard Levitt, "Are Unions Losing their Purpose?; Law Affords More Protection to Employees," National Post, July 8, 2009, p. FP12; Christiaan Hetzner and Angelica Gruber, "Air Canada Union Considers Next Move; Rejects Offer," National Post, July 3, 2009, p. FP5; "Benefits Leave Companies Weakened; Unionized Firms Fight to Compete, Economist Says," National Post, June 24, 2009, p. FP4; Sheldon Alberts, "Air Canada Unions Relent on Pensions; Grim Financials," National Post, June 10 ,2009, p. FP1; Greg Keenan, "Being 'Blackmailed,' CAW Says," The Globe and Mail, May 20, 2009, p. B3; Jeff Sanford, "Kenny’s Last Stand," Canadian Business, April 13, 2009, p. 26.

Answers to Questions for Discussion

1. Explain in your own words how the interdependent, global economy of the 21st century has caused major problems for unionized Canadian automobile manufacturers. Do non-union automobile manufacturers have the same problem?

The interdependent, global economy of the 21st century means that competition has arisen between companies that are located at many different places in the world. Automobile manufacturing now takes place in countries as diverse as Canada, South Africa, the United States, Germany, India, China, Russia, and Brazil. Worker wages in these diverse locations range widely, and therefore the cost structures of auto makers are quite different. Historically, unionized Canadian automobile manufacturers operated in a relatively protected environment without a lot of foreign competition and their cost structures became quite high. But since most of the cars produced in Canada were sold either in Canada or the U.S. (and since U.S. manufacturers were also unionized) there were no problems. But about 30 years ago, foreign competitors (who were aggressively non-union) began setting up manufacturing facilities in Canada. They made high quality products and had a lower cost structure than Canadian firms. Over time, they were increasingly successful at convincing Canadians to buy their cars. Recently, the pressures became so great that GM and Chrysler declared bankruptcy and had to sharply cut wages of unionized workers in order to get back in the game.

Both unionized and non-unionized automobile manufacturers face the same general problem: satisfying consumer needs in a highly competitive global environment. But non-unionized companies have greater flexibility in doing so because they pay their workers less and therefore have lower cost structures. They have the flexibility to decide, for example, whether to price their cars lower than their unionized competitors, or to maintain roughly equal prices but build more quality into their cars. In either case, consumers will be more likely to buy their cars. This is exactly what has happened during the last few years. It remains to be seen whether the new, lower wages that are going to be paid to workers at GM, Ford, and Chrysler will improve the fortunes of those companies.

2. What are the pros and cons of union members having an equity stake in the company they work for?

On the positive side, when union members have an equity stake in the company they work for, they become part owners of the company. As such, they should be more motivated to work effectively and efficiently, and to cooperate with management in creating a high-performing company. Such cooperation is a prerequisite for improving the financial performance of the company, which, in turn, will cause the company’s stock price to increase. The workers will benefit because they own the company’s stock.

On the negative side, when unionized employees own stock in the company they work for, they may be confronted with a dilemma. On the one hand, employees are members of the union, which may view management as an adversary because it is not receptive to workers' demands for higher wages and benefits. This means that there is antagonism between workers and management. On the other hand, employees are supposed to cooperate with management in order to facilitate high corporate performance. In practice, it is difficult to be antagonistic and cooperative at the same time. What often happens is that workers and managers retreat to their traditional roles and cooperative effort is not be evident. Consider what happens when unionized employees feel that they are underpaid. What should they do? Negotiate for higher wages? Work harder in the hope that the company will perform better and reward them with higher wages? Faced with these two alternatives, workers will likely decide to negotiate for higher wages. But, if workers are successful in such negotiations, the company’s cost structure will increase and overall financial performance of the company may decline. That, in turn, will cause the price of the company’s stock (which employees own) to decline.

3. Consider the following statement: Unions have historically been very successful at extracting increased wages and benefits from employers, but this success will be the downfall of unions because the cost structure of Canadian companies has increased to the point where the companies cannot price their products competitively. Once that happens, the companies will go out of business and all the workers will lose their jobs. Do you agree or disagree with the statement? Explain your reasoning.

When a company goes out of business, its workers do lose their jobs. That connection is quite clear. But the connection between worker wages and company bankruptcies is more complex. In the broadest sense, if a company with a high cost structure tries to compete with other companies with a much lower cost structure, it is going to have difficulties (think GM, Ford, and Chrysler). While it took many years for this situation to develop, the hourly wages paid to production workers in the three domestic automakers were recently far higher than the wages paid to non-union workers at companies like Toyota and Honda. In the early 21st century, the situation became intolerable and GM, Ford, and Chrysler simply had to scale back wages or go out of business.

But simply focusing on worker wages ignores another important element in company success. That element is the quality and attractiveness of the product or service that is being offered to consumers. A company that has a high cost structure may be quite successful if its product offerings are in high demand by consumers because the product satisfies a consumer need. In fact, a high cost structure may be necessary in order to make products that attract certain kinds of customers. This is particularly likely for luxury goods. But luxury goods are attractive to only a small portion of the population. The fact is that for most consumers low prices are an extremely important issue. Therefore, companies that cannot provide a reasonable product at low prices are going to have difficulty surviving in a globalized market.

The key issue is the relative cost structure of companies in the same industry (whether that is high or low). A company whose cost structure is much higher than its competitors is going to have difficulty. When unions are successful in extracting higher wages from management, workers benefit (at least in the short run). But in the long run, serious problems may result. The automobile business is particularly interesting because unions are well entrenched in certain companies, but not in others. Over the years, unions at GM, Ford, and Chrysler succeeded in getting much higher wages for their workers, but the products sold by those companies could not compete with the products made by lower-wage, non-union workers at companies like Toyota and Honda.