III. Building Unions That Grow and Innovate

Part III of a Labor Day Series on Revitalizing Private Sector Unions

Part One described how our laws stifle the growth of private sector labor unions. I argued that even if Congress simplifies organizing and bans management misconduct, organizing cannot grow unions strong enough to reduce income inequality. 

I. Why Force Unions To Run a Red Queen’s Race?

Part Two argued that fragmented bargaining subverts solidarity and exclusive bargaining stifles competition between unions. Unions think of competition as zero-sum “raiding”, but competition complements solidarity and builds stronger unions.  

II. Subverting Solidarity

There is no perfect way to structure bargaining rights, but this final post outlines an approach to grow unions to raise the pay of low-wage workers. Like any new approach, it needs to attract a winning political coalition and contend with unintended consequences. 

Focus Collective Bargaining on Low-Wage Work

Excessive income inequality fuels cultural and political polarization. It leads to inherited privilege, reduced mobility, populism both left and right based on a cynical view that “the game is rigged”. But too little inequality impedes innovation and initiative at some point. It’s not clear what the optimal level of inequality is, but very few people think that the United States would be better off with more. (How we measure income inequality and account for the recent decrease of inequality is important but too technical for this post. For those who want to dig a bit deeper, I have a sidebar on the topic here.)

Market economies make incomes more equal by either raising pay or redistributing it. We already redistribute a lot of  income by cutting taxes or increasing social benefits. As Matt Yglesias recently noted, “if you take in-kind transfers (SNAP and Medicaid) into account, the American government is actually more redistributive than European welfare states.” (His assertion requires asterisks. Our higher education costs more, our health care comes out of our paychecks, not our taxes, and our pre-tax incomes are far less equal than European incomes to start with. We distribute more but still end up with higher inequality than most European countries and much higher than Nordic ones).

The second way we reduce income inequality is to raise pay at the bottom. These so-called “pre-distribution” efforts include minimum wages, education, and anti-discrimination laws. Pre-distribution reduces pressure for redistributive taxes and transfers. The highest impact pre-distribution laws are those that regulate collective bargaining.

When collective bargaining works, private agreements reduce the need for redistribution. Ironically perhaps, many countries with strong collective bargaining do not have especially progressive tax regimes. Many rely heavily on a value-added tax – a  regressive national sales tax. On the other hand, when collective bargaining collapses, those concerned with inequality often fight for a more progressive tax system. Tax increases are unpopular, so this is always a very heavy lift politically.

If the goal of collective bargaining is to reduce income inequality, we should focus on those who earn below-median pay. This is about $60,000 or $30/hour for a full-time worker in the US. Most professionals and many in the trades have the skill, experience, relationships, and market power to bargain their own pay. We need to design unions to focus on raising the pay of those whose skills the market sees as fungible.

In 2019, Brookings found that low-wage workers (defined as those earning less than $16.09/hr adjusted for local living costs) make up 44% of all workers aged 18-64 in the United States. They are more likely to be parents and are usually the sole earners in their families. One-third earn less than the federal poverty line (about $36,000 for a family of four). Almost half have a high school diploma or less.

Many are stuck in place, as Raj Chetty and his team Harvard have demonstrated. Their rigorous work shows how strongly income inequality is now associated with low levels of social mobility. In areas with high income inequality, low-wage workers not only have fewer opportunities to improve their economic status, but their children are far less likely to move up the income ladder than they once could.

Low-income workers are not distributed evenly throughout the economy. Very few work in technology, finance, or professional service firms that compete in demanding global markets. They concentrate in lower productivity, non-tradable sectors like health care, retail, construction, hospitality, education, government services, transportation, and distribution. These sectors face less pressure to improve productivity, so low wages become integral to the business strategy of many companies in these industries.

Ideally, union wages force companies to invest more capital per worker and increase productivity. Economists call this “capital deepening”. When capital deepening grows productivity, the pie grows faster than the headcount. This means that everyone can earn a larger slice. Collective bargaining ensures that they actually will.

We have seen higher wages drive capital deepening in the past. During the fourteenth century, the Black Death killed so many people that labor scarcity forced up wages. British industrialists suddenly had a strong incentive to turn cheap coal into steam power. The result was the Industrial Revolution and, eventually, a massive increase in living standards. In modern times, unions can promote capital deepening without obliterating half of the population.

I once saw a clear example of this at a paper mill in Alabama. Two men were stacking warm plywood sheets as they came off the finishing machine. This monotonous job is typically automated. The foreman explained why they did the job by hand,  “Wages are so low here” he said, “that we can’t afford to automate”.

New Unionism in Three Reforms

How do we create unions that help increase productivity and pay? We saw earlier that bargaining is best done at the sector level to avoid penalizing individual companies. We noted the need for workers to have a voice at the workplace, board, and sector level and the value of enabling workers to pick the union that best meets their needs. This suggests three related reforms.

• Use federal tax credits as wage subsidies to create incentives for states to convene wage boards to bargain pay in low-wage sectors;

• Amplify worker voices at work with advisory workplace councils and in larger companies with board representation; and

• Allow workers to join the union of their choice.

1. Use Wage Subsidies to Convene Wage Boards for Low-Wage Sectors

Rather than ask workers to win a war at work in order to obtain bargaining rights, we should make wage boards the default in low-wage industries. We do this now for shareholders when we give them the legal right to a board of directors. Nobody forces owners to “organize”. 

Wage boards are not a new idea. During the late 30s and early 1940s, the US Labor Department convened dozens of “industry committees” to test a form of sector bargaining. Unions and companies agreed to raise the minimum wage in several sectors. Union membership exploded. The Second World War, union politics, and a conservative backlash ended the experiment. But several states still have legislation enabling wage boards. California is testing wage boards with home health and fast food workers. These boards engage business, labor, and public leaders to set statewide standards. Other states including Minnesota are also testing wage boards.

To make wage boards common in low-paying industries, we should offer wage subsidies in the form of tax credits to states that test them. Wage subsidies are popular with companies because they help employers hire people that they might not hire otherwise. Today the federal Work Opportunity Tax Credit (WOTC) gives employers an incentive to hire disadvantaged workers. Targeted workers include veterans, ex-felons, rural residents, and recipients of food stamps or social security income. Note that wage subsidies combine pre-distribution (pay raises) with redistribution (tax credits).

Economists like wage subsidies because they maintain worker income, increase hiring, grow skills, and prevent layoffs. This proposal for wage subsidies granted via wage boards would enable employers to bargain wage increases without bearing the full financial burden. To boost low-end wages, the  subsidies would target sectors with the most low-paid workers and would phase out as wages increased. The details matter, but done well, wage boards can structure a race to the top in labor markets that employ a lot of low-wage workers.

We should give states and wage boards flexibility in how to use wage subsidies, as the WOTC does. Some wage boards might decide to target the subsidies to regions with high poverty rates. Others might focus on industries facing downturns or on companies offering training programs. When combined with the Earned Income Tax Credit and a restored Child Tax Credit, bargained wage subsidies can both increase worker pay and help employers acclimate to sector-wide bargaining.

Agreements resulting from wage boards would be binding on all employers in the industry (including subcontractors, staffing agencies, gig work platforms for full-time workers, and franchisees). As a result, they will bring unintended consequences. This is one reason to test and refine them at the state level. Wage boards may weaken unions for high-wage workers. (I would argue that this is a price worth paying, but high-earning union members might disagree). They could undermine support for a minimum wage. And they will force businesses to organize.

Outside of lobbying, American companies rarely form associations to shape labor markets. But wage boards create a powerful incentive for companies to organize by sector and often by region. This is useful because organized employers can invest more in training than a single company can justify. They can establish training and certification standards that enable local colleges to provide workers with missing skills. They can construct on-the-job training and internship programs more easily than individual companies can. They can use sector bargains to negotiate skill standards that make it easier for workers to transfer between companies. And by bargaining as a sector, companies remove the (usually low) risk of destructive union organizing at individual companies.

Some worry that organized companies will use wage boards to collude to keep wages lower. They will, of course. But far better for companies to bargain wages with labor representatives and public oversight than to collude in private using consultants and wage surveys. Will large companies or unions try to use sector bargains to protect their competitive position and damage challengers? Yes – which is why one of the demanding jobs of public representatives on wage boards is to prevent capture by powerful incumbents.

Wage boards mean that companies in low-wage sectors would no longer be nonunion by default. If a coalition of companies agree with labor on common standards, the competitive impact is usually modest. McDonalds pays workers in Denmark more than $20/hour, six weeks vacation, and pensions not because it is charitable. It is willing to do so because it knows that its competitors must do the same. Denmark does not bother to legislate a minimum wage. In their experience, private bargains do a better job protecting low-wage workers. And according to The Economist, a Big Mac costs the same in Denmark as in the US.

A reform like this needs to resolve important details. Who decides what constitutes a sector? Which unions and which companies participate? How are agreements ratified and enforced? How can we define a scope of bargaining to maximize trust, experimentation, and performance? Who has the right to what payroll and job information? There are smart answers out there, but we would be wise to test various approaches at the state level before setting out federal rules. This is an excellent opportunity to use our states as the “laboratories of democracy” that Louis Brandeis declared them to be.

2. Amplify Worker Voices in Workplaces and on Boards

Sector bargains are not designed to address workplace concerns. Workers need the simple right to petition for an advisory council in any workplace with more than one hundred employees. Smart companies will take worker input to heart (indeed, many already do).

Some unions worry that corporate efforts to engage employees in improving product or service quality undermines their fragile bargaining rights. During the 1980s, I was in charge of subverting corporate efforts to engage members of the Machinists Union in improving product quality. I designed ten ridiculous demands to ensure these initiatives never got off the ground. It worked everywhere until a savvy aerospace executive called my bluff by agreeing to every single request.

We should enable people working at investor-owned companies with more than five hundred employees to elect a representative to the board. Why? After all, boards are not parliaments and board representation is not a panacea for anything. Research suggests that by itself, labor representation on a board does not raise pay. Board representatives are fiduciaries – they must advocate for the long-term interests of the business.

In my experience as a worker representative to a board, these roles are mainly symbolic and informational. But symbols and information matter. The odds of enlisting employee support for difficult measures in a crisis are higher if a trusted labor representative can advocate worker views and summarize board deliberations. Without board representation, it is unlikely that German workers would have proposed kurzarbeit, or shorter work-weeks instead of layoffs, when the economy hit a recession. Board representation matters much less than most of its advocates think. But the downside is modest, so we should test it.

A board representative needs to think like an owner as well as a worker. Many who play this role will conclude that workers should be partial owners of a company. Unions rarely agree. They argue that low-wage workers should not hold undiversified shares in a single company. On the other hand, as the inventors of Silicon Valley worked out almost seventy years ago, employees are already taking a massive bet on their employer. So why not share the upside? This debate would become far more interesting with an employee board representative.

We do not need labor unions to form non-contractual workplace councils or to have employee representatives on boards. But unions and managers will naturally seek to influence and will be influenced by these forms of worker voice. That’s a feature, not a bug.

3. Respect Worker Choice

Letting workers choose their union would introduce healthy competition into the labor movement. Instead of trying to protect a dwindling membership base, unions would recruit from the 70 million Americans who earn less than $25 an hour. Large unions would become stronger, while smaller ones would innovate or specialize. Workers would be better served by the choices that a robust union ecosystem would offer.

Having many unions does not interfere with bargaining. Unions understand coalition bargaining very well. Unions of nurses that bargain with hospitals cooperate with unions of x-ray techs and housekeepers all the time.

Letting unions recruit instead of forcing them to organize will let them grow. After all, many membership-based organizations grow quite large this way. The US has 14 million union members, but the AARP alone has 38 million members. But voluntary membership introduces a free-rider problem. Workers will be tempted to enjoy the benefits of broad union representation without contributing to the cost.

This is a non-trivial concern. It may require union security measures that divide payments between unions. It could force labor organizations to develop new services and revenue models. It would reward efficiency measures that enabled unions to represent more workers for less money.

Solving this problem is a small price to pay to give unions access to representing the nation’s 75 million low-wage workers. Unions that compete to recruit low-wage workers can grow much larger than those that try to organize for exclusive bargaining rights, even if we pass laws to make organizing easier.

The Politics of New Unionism

No legislative coalition yet exists for trying to rebuild our labor unions. It is unlikely to happen without the support of companies, unions, and affected workers.

Winning business support for the approach outlined here is possible, but not likely in the short term. Would wage subsidies, the opportunity to set minimum pay for a sector within a state, and the chance to define skill standards that make training and hiring easier win business support? Not yet, although it might win support for more experiments like California and the Service Employees (SEIU) are running. The promise of less NLRA-style labor organizing is helpful but not compelling because for most employers the risk of an organizing campaign is extremely low.

Unionized companies might be more receptive because most of them prefer labor agreements that apply equally to their competitors. But most companies are not unionized and business leaders treasure autonomy. In my experience, few CEOs embrace independent-minded unions, regulators, board members, analysts, journalists, activists, or customers. I founded a fast-growing e-commerce company and felt this way during my decade as CEO. (Our employees never unionized; I would have been a pushover.)

Many employers compete by developing talent, deploying technology effectively, building better products, and working work smarter. They do not compete by bidding down labor costs. These innovative companies know who they are. They would prosper under sector bargains, so long as the contracts that resulted did not protect incompetent workers, sow distrust, or otherwise impede experimentation and growth.

For some unions, this is a tall order. Indeed, it is not clear that most unions will ever seek a new labor architecture. Many depend on dues obtained under exclusive bargaining rights. Most are reluctant to seek new service and revenue models, fee-sharing methods, and efficiency measures. Many prefer to take their chances on passing the PROAct and trying to organize minuscule bargaining units. Others are allergic to the idea of giving companies tax credits, despite evidence that corporate taxes suppress compensation. (To be sure, these taxes also may reduce dividends and customer discounts. Economists love to debate corporate tax incidence. The only thing they agree on is that corporations do not really pay taxes — they pass them on to workers, owners, and customers).

Unions might learn from the last time a major structural shift threatened them. During the early twentieth century, the rise of large-scale manufacturing and transportation companies overwhelmed craft unions. These unions had been built for a more artisanal economy and could not accommodate large numbers of immigrant industrial workers. In order to grow again, unions had to create a new form of bargaining.

Unions did not pass laws making it easier to organize guilds and craft unions. Instead, they built industrial unions. They fought for laws like the NLRA that created a legal framework to support unions appropriate for a mass production economy. This required a civil war within the house of labor as well as sharp confrontations with many companies. During this time, unions not only fought companies for recognition, they fought each other for members. It wasn’t always pretty, but the model worked and they grew like crazy.

What will move organized labor to rethink collective bargaining for low-wage workers in an economy that is literally unrecognizable from the world into which it was born almost a century ago? Nobody knows, but legislative coalitions come together in surprising ways. Roosevelt backed the NLRA in part out of sympathy for industrial workers, but also to curtail the massive industrial unrest that he felt compromised our ability to prepare for war against the rising menace of German fascism. 

In our time, we should pray that the looming threat of world war is not the issue that forces America to rethink our labor laws. However, the economics of income inequality may not mobilize as much sustained attention as I think it merits. In recent years, cultural signifiers have shaped American and global politics more than economic interests. Populist resentment, not economic policy, led large numbers of men and non-college women to the Republican Party. If America ever rethinks how we structure private sector unions, the catalyst for doing so may come from an entirely unexpected place.

Note: Oren Cass at American Compass, a pro-labor conservative think tank, has published a condensed version of this series here.