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Contracts play a pivotal role in a free economy. Every time we buy or sell something, whether it is a home or a cup of coffee, there’s a contract. Sometimes these contracts are long, complicated things that are the product of weeks of bargaining, like the contract that the UAW just agreed to with GM. Sometimes they are informal things that are made and expire so quickly we hardly notice them. You grab a table at the local diner and the waitress takes your order. You’ve just made a contract. After you’ve finished your meal and you pay the bill, the contract is done.

For a majority of Americans, the most important contracts we’ll ever agree to are the ones that we make with our employers. Those are the contracts that govern how we’ll spend 40 or more hours a week and how we’ll fund nearly all of our purchases. Depending on the specific terms, these contracts may also play a large role in how we finance our retirement or receive health insurance.

But the laws that govern these contracts get little attention considering just how important they are. That applies in particular to the laws that govern union representation, which is unfortunate because Michigan is at a point where it needs to re-evaluate the role that unions play in the state’s economy and government.

Union membership has been dropping for decades. Between 1986 and 2006, unions lost 1.6 million members and saw their percentage of the workforce decline from 17.5 percent to 12 percent. Michigan unions are somewhat stronger but they’ve been losing members here as well, losing 275,000 members between 1986 and 2006 and seeing their share of the workforce drop from 28.3 to 19.6.

But unions remain very influential in the political realm, and they can be counted on to oppose a wide range of free-market solutions to the state’s problems. Meanwhile, the core of our labor law dates back to the 1930s, when the economy and society and most of the jobs themselves were very different.

At the top of this page you’ll find an illustration of where labor law has been, where it is now, and where it really ought to go. Labor law has swung wildly from periods where unions were subject to needless restrictions that shortchanged workers to the current day where unions are protected to the point that they are unaccountable to the people they are supposed to represent. Union officials will often claim that free-market ideas are anti-labor. Mackinac Center scholars have been critical of a lot of things that union officials have done, but also complimentary when intelligent union leadership presents itself. A look at the larger picture will show that the restoration of balance and accountability that will enhance worker rights.

The labor law structure of today has been in effect for more than 70 years. An entire generation of union leaders, lawyers, economists and policymakers has grown up, been educated and worked through their careers without seeing any major change in how relations between workers, unions and employers are governed. One effect of this lack of change is that few people grasp the extent to which the government interferes in this important area of the economy.

Relatively modest changes, like a state right-to-work law, seem radical, but if one takes a slightly longer view of history they are anything but.

In the late 1800s, as industry began to take hold in the U.S., workers began to see value in banding together to present a united front to employers. Early labor unions such as the National Labor Union, the Knights of Labor and the Industrial Workers of the World rose and fell, but eventually the American Federation of Labor found lasting success by focusing on "bread and butter unionism" that improved wages and conditions in the workplace while placing a lower emphasis on political activism.

The AFL prospered in spite of the lack of supportive legislation, but the judiciary of that period was prone to take sides against unions. Looking at the pendulum above, labor law tended to tilt to the left side, towards restricting unions. Many of these decisions gave short shrift to the fundamental rights of workers. To give just a couple of examples, the Supreme Court of Massachusetts arguably barred peaceful picketing in one case. One New York court enjoined a strike because the union’s demands included limits on working hours designed to increase employment opportunities. In addition, the courts were prone to use the Sherman Act, which Congress passed in response to the perceived threat of industrial monopolies, against unions on the grounds that unions tended to act "in restraint of trade."

The early to mid-1930s saw the passage of federal legislation that swung that pendulum in the opposite direction. The keystone was the Wagner Act, now known as the National Labor Relations Act.

The NLRA gave unions remarkable prerogatives. Where union recognition had been at the discretion of employers, it was now mandatory, and where union membership for workers was optional, it could be compelled. The natural sympathies for working men and women, combined with a history in which unions had been treated unfairly in the courts, tended to obscure the dramatic shift in power, but as Friedrich Hayek observed in the "Constitution of Liberty,"

"...any union effectively controlling all potential workers of a firm or industry can exercise almost unlimited pressure on the employer … where a great amount of capital has been invested in specialized equipment, such a union can practically expropriate the owner and command nearly the whole return of his enterprise."

To Hayek, control over workers was the key to control over enterprises:

"...the coercion which unions have been permitted to exercise contrary to all principles of freedom under the law is primarily the coercion of fellow workers. Whatever true coercive power unions may hold over employers is a consequence of this primary power of coercing other workers..."

And that’s where we stand today. In Michigan we have recently been treated to the drama of negotiations — and a pair of short strikes — in which the main issue was whether or not Detroit’s automakers would be able to restructure its workforce and compensation in such a way as to make the company competitive. In these negotiations the actual workers were largely bit players and the critical role was played by UAW President Ron Gettelfinger.

As things stand now it appears that the UAW and the companies were able to work out an agreement that will make Detroit rolling iron much more competitive, but a miscalculation on the part of Gettelfinger and those close to him might have denied Detroit’s automakers the ability to make the necessary changes, with catastrophic consequences for tens of thousands of autoworkers, not to mention a state where automobiles are the state’s signature industry.

Gettelfinger has this power because one cannot legally work in most blue-collar jobs at GM, Ford or Chrysler without accepting the UAW’s representation. The companies cannot go around the UAW to deal with their employees directly, and as a practical matter it has become nearly impossible for workers at these companies to remove the UAW. We in Michigan are fortunate that this time the union’s leadership has exhibited some understanding of the economy. They have not always done so. If they had acted rashly neither the workers nor management nor the residents of Michigan would have had any effective remedies. As it is, a lot of Michiganians are left wondering if the concessions might have been less sharp, and the job losses and economic distress suffered throughout Michigan less severe, if the UAW had been willing to make concessions earlier.

Which leaves the people of Michigan with an important question: Was it wise to put so much economic power in the hands of one organization?

The National Labor Relations Act works in many ways to empower union officials and shield them from accountability to the workers that they are supposed to represent:

  • Mandatory recognition by employers is perpetual. Once a union is installed an employer must continue to treat that union as its workers’ representative unless it has remarkably strong evidence that the union has lost the support of its employees.

  • An individual worker in a union-represented bargaining unit may not declare himself independent and bargain on his own behalf, but rather must accept what the union negotiates for him or find work somewhere else. This in turn makes it much more difficult for the workforce to know whether or not the union is securing them adequate benefits, there being no non-union coworkers of similar job classifications against whom to make a comparison.

  • If a majority of workers are inclined to remove the union it is possible to do so, but the process is difficult and seldom attempted. Workers typically must wait until a collective bargaining agreement is near its end to start the process, which requires the collection of signatures from 30 percent of the workforce (a daunting task in a large company with thousands of workers scattered at several plants) in order to set up a worker vote to remove the union. Just collecting the signatures is bound to attract the attention of union officials, who understandably will not look kindly on those who lead the petition-gathering effort.

  • In most states (those without a right-to-work law, like Michigan) a union can ask the employer for a contract clause stating that all workers covered by that contract must either join the union or pay an agency fee in lieu of dues. There being no financial incentive for the employer to refuse, the union almost always gets this in the contract. Union coffers are thus enlarged by membership dues extracted from workers who are indifferent towards or even opposed to the union. This money can come in handy for, among other things, fighting off petition drives to remove the union.

The result of all this is that rather than acting as a representative for workers — closely accountable and subject to replacement if they fail to meet employee expectations — unions are prone to become a third force in the workplace, largely free to pursue their own interests in all too many cases. This sort of thing would be rare in a real free market, where workers would quickly abandon a union that was not pursuing their best interests if they had the freedom to do so.

The extent to which compulsory unionism distorts the employment market and hampers economic growth is difficult to calculate, but a hint can be found in the record of states with right-to-work laws. Right-to-work is a relatively modest step but it does restore some worker freedom and restraint over union activity by prohibiting agency fees and allowing individual workers to decide whether or not the union has earned their financial support.

Under right-to-work, union officials must persuade workers to pay dues, rather than simply negotiate for them with employers. It may seem ironic, but this law empowering workers has proved to be a powerful magnet for employers, who given the choice tend to prefer to start or expand their businesses in states with right-to-work laws. This increases the demand for labor in right-to-work states, creating jobs and boosting wages.

There are a number of reasons why this is so, but they boil down to one thing: It is better to have unions that are accountable to the men and women they represent than it is to have unions that are accountable to nobody.

As our recent report on the economic effects of right-to-work laws shows, right-to-work states have noticeably higher rates of economic growth, have added jobs at twice the rate of non-right-to-work states, and have higher rates of disposable per-capita income growth as well. Michigan has historically prided itself on being a high-wage state, but we estimate that by 2010 most right-to-work states will have disposable per capita income that is higher than Michigan

Just as important, Michigan has extended this same sort of mandatory unionism law to government employees — all the requirements of mandatory recognition, forced membership and forced dues with all the inflexibility that the federal government imposes on unionized workplaces in the private sector.

The results of this have been fairly clear. Government employee unions in particular are one of the most stubborn obstacles we face to enacting rational policies such as privatization, educational choice and balancing government budgets with spending reductions rather than tax increases that choke off economic growth. We estimate that in Michigan alone government employee unions receive more than $150 million annually from state and local governments in the form of union dues. Court cases on the use of union dues have found that little of this money, perhaps as little as 10 percent, is used for workplace representation. The work rules and job guarantees found in collective bargaining agreements can hamper a wide range of reforms or innovations that might otherwise make government less expensive and more effective.

With millions of dollars in mandatory membership dues and the authority to negotiate collective bargaining agreements on behalf of workers with little regard to those workers’ individual preferences, government employee union officials have tremendous power — far more power than they would likely have if membership dues and representation authority were limited to those workers who joined voluntarily.

Again, recent drama from Michigan illustrates the problem. Last September the Legislature, confronted with an overspending crisis of nearly $2 billion dollars, faced a possible government shutdown because of its inability to pass a budget. (In fact the government was shut down for about four hours early in the morning of Oct. 1.) One would think that a state with a stalled economy — real GDP had actually declined from 2002 to 2006 and the state has lost both jobs and taxpayers at an alarming rate — might want to hold the line on taxes as much as possible and give employers a chance to recover. But a governor who had been elected with heavy support from government employee unions, especially the powerful Michigan Education Association, insisted that the gap be made up almost entirely with tax increases. In the end she got her way. Instead of controlling expenses, Michigan increased taxes by $1.5 billion.

It doesn’t have to be this way. Unions are not inherently evil, and there are many decent men and women in the union movement today. Union critics should keep in mind that leading a union can be hard work, especially in the midst of the one-state recession we have in Michigan. But the labor law we have today has created perverse incentives and allowed union officials to lose touch with who they represent. Forgotten is their proper role in our society — representing workers in the workplace rather than influencing government. If the union movement is to be a strong and positive force in Michigan and the country as a whole, the lines of accountability between union officials and the rank-and file will need to be strengthened, and the best way to the that would be to give individual workers the freedom to break away from forced representation and forced dues.

Over the last 70 years we have had a union law in which the main features have been forced representation of workers, forced recognition by employers and forced dues from opponents. The result is a union movement that is associated with declining industries, overgrown and inefficient governments, and sluggish economies.

Prior to that we had courts that placed unions under severe and unfair restrictions that hampered working men and women in their efforts to get the best wages they can for their labor. Our state economy and workers themselves would benefit if we were to bring the pendulum back to center: genuine government neutrality towards unions, with no special favor and no unnecessary restrictions. Where unions have been allowed to resort to legal mandates, they should now rely on persuasion. While legislators at the federal and state level will need to work out details, the following principles should act as a guide:

  • Voluntary membership: workers decide whether or not to join a union.

  • Voluntary representation: a union represents its own members and does not bear the burden or the authority to represent anyone else.

  • Freedom of action: a union and its members may take any action they deem necessary, including strikes (except for essential government employees), picketing and boycotts, subject only to the requirement that they honor contracts in force and refrain from violence or threats. The same goes for management.

  • In the meantime, Michigan in particular would benefit greatly from enacting a state right-to-work law. The power wielded by unaccountable unions creates a burden that our economy can no longer bear. Right-to-work would restore some semblance of balance and freedom to labor relations in Michigan, and make the state much more attractive to employers. Right-to-work is not a cure all; Michigan faces lean years in any event, but right to work would make the current slump less severe and hasten the day of Michigan’s recovery.

    Unions can and have played a valuable role in a modern economy by providing workers with expert representation and the ability to present a united front to management where it’s called for. It was a trade union, Solidarity, which triggered a chain of events leading to the fall of the Berlin Wall and the collapse of the Soviet empire. Today, unions make up much of the opposition to Islamic totalitarianism in Iran. There should always be effective unions and workers should always be free to turn to them for help.

    But unions must be fully accountable to the people they represent and workers should have broad freedom to either negotiate for themselves or choose who will represent them. Achieving this will require a remarkable shift in attitudes, and the shift away from an unaccountable union movement has been underway for decades, both in Michigan (where unions lost 275,000 members over the last 20 years) and across the country.

    The question before the people of Michigan is: What will be our next step? We can leave things as they are and continue to have a union movement that serves fewer and fewer workers but also continues to use agency fee money to fight needed reforms in state government, or we can move our labor law back towards balance with a right-to-work law, with unions that are more accountable to the men and women they represent and a state that is more attractive to business and industry. The choice is up to us.

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    Paul Kersey is director of labor policy for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

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