How Unionized Labor Factors into the Profitability & Competitiveness of Enterprise

One the largest chunks of overhead for any organization - public or private - is labor. And labor is quite often the backbone of an enterprise. A longstanding concern for any organization is whether or not its work force is unionized.

Organized labor emerged in the early part of the twentieth century when sweatshops prevailed; child labor laws did not exist; and signs that read "If you don't show up on Sunday, don't show up on Monday" hung at the entrance to mills in the industrial Northeast. Labor laws were enacted, and labor unions became a playing card in the productivity as well as the profitability of many enterprises. In fact, newspapers in Detroit ran a column devoted to all aspects of unionized labor for its famed auto industry. Although things are much different today, the labor-management debate continues, i.e., fair and reasonable wages for workers versus the economic toll for an employer to pay such wages and remain profitable.

Staying Competitive
What factors should be considered in weighing the circumstances of unionized versus non-unionized labor? How does this factor into the profitability equation of any enterprise that is strategizing a location decision?

"While operations which have been unionized for some time can have a competitive disadvantage based on the compounding impact of years of contract negotiation, that is less often the case today for newly unionized companies with some level of labor sophistication," says Tom Davis, Chair of the Traditional Labor Practice Group at Ogletree Deakins - a Nashville, Tenn.-based law firm specializing in labor and employment. "Instead, during negotiations those newly organized companies typically understand that they must negotiate hard for wages, benefits, and working conditions that will allow them to remain competitive. As a result, there is, in my opinion, no longer a cause-and-effect relationship between unionization and richer wages, benefits, and/or work rules. [Nonetheless], non-union companies are typically more profitable even when providing comparable wages and benefits since the overhead costs of operating a union company are greater."

Site Selection Factors
Wages and benefits are a vital ingredient in the work force planning efforts of any organization that expands, contracts, or develops its geographic position. In fact, labor considerations are an integral part of any location decision and one that often steers the final decision.

"It seems to me that many different factors go into an organization's site selection decision," says Davis. "While the general labor environment - whether the state has a right-to-work law and perceptions about the ability to remain union-free - is often on the list of factors considered, and is more critical for some companies than others, I think those factors rarely drive the decision. In my opinion, the decisive factors are much more likely to involve financial incentives, the availability of an adequate pool of skilled workers, transportation, and proximity to customers - rather than whether the area is perceived to be `anti-union.' That being said, over the past decade it seems that the right-to-work states have had more success attracting major transplant companies than states that are historically more heavily unionized."

Jerry Glass, president of F&H Solutions Group, a labor and human-capital consulting firm located in Washington, D.C., believes that it all comes down to how competitive a company will be in a specific location. "Corporations seek locations where they can get reasonable lease rates.where [they] will not be over taxed or have laws and regulations that restrict [their] ability to be competitive," he says. "Also, depending on the business, easy access to airports or other modes of transportation can be an important consideration. Other factors also come into play, including.quality of life for employees."

Glass says that companies becoming unionized are not a function of where they are located, but more a function of past history, corporate culture, and reputation. "Boeing has had unions for many decades, and has been profitable and unprofitable with unions," he says. "The same can be said for nonunion companies. I would stress that a corporation take into account all [location] factors - tax base, ease of transportation, ability to attract quality workers, good school systems, etc. Companies are not all looking for the same things when they decide where to locate. One size does not fit all."

Labor-Management Relations
Glass qualifies his views by saying that the profit factor is not a corporation's only concern when it comes to being unionized or non-unionized, because labor markets are still driven by supply and demand for competitive jobs. "I would say it is only a piece of the equation, because employers still have to pay competitive wages to attract workers," he adds. "Where unions fail in their job is by trying to create a wage system that is not based on being competitive, but rather based on leveraging the company to pay above-market rates. Also, having a union largely eliminates the direct relationship between an employer and its employees, making it more difficult to communicate directly with employees [and] more difficult to respond to market changes quickly, creating inefficiencies where they might otherwise not exist," he explains.

Professor John Logan, director of Labor and Employment Studies for San Francisco State University, also believes that labor costs are no doubt an important factor in a location decision. However, whatever labor circumstances a company might have, its ability to develop a good labor-management relationship is more predictive of its profitability than strictly a union versus non-union decision point. It is true that "[unionized] workers often earn higher wages and enjoy better benefits than their non-union counterparts," he says. "However, workplaces with cooperative relationships between unions and management often enjoy the benefits of lower turnover [and] better trained and more productive work forces, so they can be just as profitable as their non-union competitors."

Marc Furman, an attorney and chair of the Labor and Employment Group of the Philadelphia-based law firm Cohen Seglias Pallas Greenhall & Furman PC, says that many manufacturers have chosen traditionally non-union locations with the belief that the local work force can be trained to do the work needed. However, he notes that some construction-related companies may seek out a unionized work force if they manufacture construction products that are typically installed by union trades people. "They seek the `union label' in order to have easier sailing with union installation companies," he says. But, "all things being equal, manufacturing companies clearly favor non-union labor pools."

For example, foreign automakers Volkswagen, Toyota, BMW, and many others have chosen to locate in Southeast states where unionization is not an issue. "The Southeast is the fastest-growing region in the country and the least unionized," posits Joseph M.A. Ledlie, president of The Ledlie Group, an Atlanta, Ga.-based public relations firm. "That's important. An overwhelming number of foreign auto manufacturers have chosen to locate in the least unionized U.S. region. Some of these companies come from heavily unionized nations.Union companies are abandoning unions."

Public Unions and the Way Ahead
Unions aren't going away, but they are certainly on the downtrend for private companies. Depending on a firm's business model and what its labor demands are, public unions could influence its ability to hire workers for certain disciplines. Public unions - those for federal, state, and local government entities - now account for the majority share of all union members. In fact, "2009 was the first year in U.S. history that public-sector union members outnumbered their private-sector counterparts," says Professor Logan. "The same was true in 2010. Private-sector union members remain important in certain industries and certain parts of the country, but their numbers have been in decline for several decades."

"Unions are desperate - they are spending millions per year in the political arena alone attempting to influence both legislation and regulation that would make it easier for them to force employees into unions," says Phillip B. Wilson, president and general counsel at the Labor Relations Institute, a consulting firm that helps companies avoid unionization, located in Broken Arrow, Okla. "They are also engaging in corporate campaigns, which are costly both in real dollars and in the public relations sphere, and which can have a detrimental long-term impact on the viability of a business."

For example, just this past April, the National Labor Relations Board (NLRB) accused Boeing of setting up a nonunion production line in right-to-work South Carolina to retaliate against unionized workers in Washington State for striking. The NLRB would like to force Boeing to make all of its new Dreamliner jets in Washington, rather than make 30 percent of them at its new production line in Charleston. The plant is completed, 1,000 workers have been hired, and production is set to begin. Michael Luttig, Boeing's general counsel, told the NLRB, "Boeing has every right under both federal law and its collective bargaining agreement to build additional U.S. production capacity outside of the Puget Sound region." A Boeing spokesperson further stated that none of the S.C. jobs come at the expense of Washington State jobs and not a single union member has been adversely affected.

The final outcome of this latest chapter in the union versus non-union work force debate will undoubtedly be significant for U.S. labor and the ability of the companies they work for to compete in today's global market.