Why Businesses Are Leery of Binding Arbitration

(Note: part four of six.)

If an example is needed to show why interest arbitration — a main component in the Employee Free Choice Act now before Congress — is a bad idea, look no further than what occurred in Detroit in the late 1970s.

In the fall of 1978, the city of Detroit was beginning to turn a corner. Crime rates were dropping — they had plummeted 19 percent in 1977 alone — and as The Detroit News observed, "People are beginning to return to the downtown, spurred by the Renaissance Center and a reduction in crime … people are beginning to lose their wariness about venturing into the city."

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The city’s finances were very tight, but the budget was balanced, and Mayor Coleman Young had negotiated a lean master contract with the American Federation of State, County and Municipal Employees which represented the vast majority of city employees. The city still had to settle on contracts with the police and fire unions, but if Young could get similar terms there, the city had a chance to hold on long enough for new businesses to take root and grow.

The city held firm in negotiations with the police officers and firefighters. The final offers from the police and firemen unions were only a bit higher than the city’s on base pay, but the unions demanded a generous cost-of-living allowance, quite an expensive perk in those days of high inflation. Unable to reach an agreement, the city and the unions went into arbitration, as required by Public Act 312. This law stipulates that public safety employees may not strike, and must accept binding arbitration when a municipality and their union reach a bargaining impasse.

The arbitration for the police officers went first, and the panel that would set the firefighters’ contract was expected to follow suit. The union and city delegates, as expected, each held out for their own sides’ positions. Then, arbitration board Chairman Robert Howlett, a former chairman of the Michigan Employment Relations Commission who had the deciding vote, came down on the side of the police union. The city responded by allowing attrition to remove 350 officers and cutting 2,300 employees from other departments. The city then hoped the courts would set the arbitrators’ ruling aside.

When the courts refused to intervene, Young eventually resorted to large-scale layoffs of police officers. In the two years after the first arbitrators’ rulings, the Detroit police force dropped from 5,400 officers to fewer than 4,000. Crime rates, which had been declining as late as the end of 1979, jumped 15.2 percent in 1980 as fewer officers were available to answer calls for assistance. A fragile "Renaissance" failed. In 1981, the union agreed to a three-year wage freeze.

To be fair, a lot of things went wrong in Detroit other than binding arbitration, but Detroit does serve to illustrate the sorts of risks involved. Interest arbitration allows arbitrators to decide binding contracts based on their own opinions of what is prudent and fair, as opposed to having employers and unions work out those contracts on their own. An overly generous award can have broad-reaching effects, and eventually backfire on those same workers it was intended to benefit — even those who manage to avoid being laid off.

Binding arbitration has proved very useful for settling disputes that might arise when there already is a contract in place, but outside of government there has been little interest in using third-party binding arbitration to settle the terms of a collective bargaining agreement when negotiations break down. Some airlines have taken this route in the past, but otherwise workers and employers in the private sector have made little use of interest arbitration.

Under the Employee Free Choice Act, employers would be forced to recognize a union after the union collects a majority of employee signatures, a process known as "card check" that leaves workers vulnerable to harassment by union organizers. As was pointed out in part two, card check removes the privacy of a secret-ballot election. With card check, everyone knows who signed and who didn’t. That same legislation goes on to state that if negotiations on an initial contract (the first after a union is recognized) break down both workers and management must accept the decision of an arbitrator on their wages and working conditions. This would especially be harmful to those employees who did not want the union in the first place.

This procedure has a poor record in Michigan, where it has been legally mandated for nearly 40 years to resolve labor disputes involving police officers and firefighters. The process has proved to be cumbersome, with drawn-out arbitrations leading to large back pay awards for workers who are forced to wait for months or years to receive pay increases.

As damaging as an ill-advised arbitrator’s decision might be for a local government, there are several reasons to believe that the risk would be even greater in the private sector:

  • Unlike the typical arbitrator’s decision in government, the EFCA would apply only to the initial negotiations after a union is recognized. This means that the arbitrator would not be able to look to prior collective bargaining agreements for guidance.

  • A conscientious arbitrator is more likely to base his or her decision on the practices of comparable companies, but this has drawbacks, too. A company with its own distinctive business model could be forced to adopt the practices of its competitors, while still using a workforce that was structured for its original, unique approach. Likewise, employees may be obligated to adopt work practices with which they are not familiar. Either way, the company and its employees may find that a competitive advantage is suddenly turned into a disadvantage.

  • If the arbitration process turns out to be a slow one, as it often is in Michigan government, business owners will be forced to prepare for retroactive back-pay awards while they wait for overdue decisions. This ties up funds that cannot be used to invest in new equipment, nor can these funds be offered as incentives to lure new workers because back-pay awards go exclusively to the existing workforce.

  • Unlike a local government, a business cannot raise taxes or turn to a higher level of government for financial assistance if an arbitrator’s decision goes against them. Competition in the free market means that if an arbitrator miscalculates and raises wages too high, companies cannot raise their prices to compensate for the decision without the risk of losing customers. These factors only increase the chances that an ill-advised arbitrator’s ruling will lead to financial difficulty and layoffs.

For these reasons, it’s clear that in the private sector either business owners or unions — or both — have little confidence in interest arbitration. Congress should think twice before forcing workers and companies into using a system they seldom use voluntarily.

Parts of this report were adapted from the Mackinac Center Policy Brief "Proposal 3: Establishing a Constitutional Requirement Extending Mandatory Collective Bargaining and Binding Arbitration to State Government Employees."


Paul Kersey is senior labor policy analyst at 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.