Union Membership for Fired Workers Too? Are We Following the Path That Ruined the U.S. Auto Industry?

Chrysler, GM Bankrupt... Welfare Won Through Strikes Since the 1960s Was the Cause

Ratification of ILO Conventions → Rising Labor Costs → Higher Prices → Consumer Rejection → Vicious Cycle of Restructuring

The United States was once the world’s dominant power in the automobile industry. There was even a time when American-made cars such as Lincoln and Cadillac were regarded as the very symbol of top-of-the-line passenger vehicles. Yet in that same United States, two major events occurred in 2009: Chrysler went bankrupt on April 30, and GM on June 1.

The bankruptcies of Chrysler and GM were caused in part by reckless management. Among the factors, there is little disagreement that labor unions played a role too large to ignore. These companies provided full health insurance coverage even for retirees and their family members. Retirees with more than 30 years of service, along with their families, were given not only medical insurance but also pensions. These were gains won through frequent strikes by the labor unions of GM, Ford, and Chrysler, the so-called Big Three of the U.S. auto industry, beginning in the 1960s.

Until the 1970s, before the U.S. automobile market was opened, labor unions may have been seen as a success story in improving worker welfare. But from the 1980s onward, problems began to emerge as high-quality, low-priced Japanese cars started entering the U.S. market. In the end, these excessive benefits, extended even to retirees, were fully reflected in rising automobile production costs. Because of their high prices, American-made cars began to be shunned by consumers at home, ultimately leading to bankruptcy.

On the 7th of this month, the Moon Jae-in administration held a Cabinet meeting and deliberated and approved three bills for the ratification of core conventions of the International Labour Organization (ILO). Ratification must still clear the National Assembly, but with the emergence of a dominant ruling party, the likelihood of passage in this 21st National Assembly has grown.

The key provision of the ILO core conventions is that unemployed and dismissed workers would be allowed to join enterprise-level labor unions. Once workers whose employment contracts with a company have already been terminated join that company’s labor union, they are no longer subject to the company’s personnel authority. It is therefore expected that they will aggressively demand higher wages and expanded welfare benefits for workers while taking the lead in confrontation with employers.

Likewise, if an unemployed person with experience in social activism, but no prior work experience at the company in question, joins that company’s labor union and leads negotiations with the employer, it would be difficult to expect efficient and effective negotiation outcomes that take into account the company’s unique culture and management conditions.

Since the monetary compensation for these union members would ultimately be financed by the dues of existing union members, it is obvious that the interests of those with the strongest incentive to push for wage increases will, in the end, distort the labor market.

If ratification of the ILO core conventions goes through, higher labor costs for firms will be passed on through higher product prices, causing consumers to turn away in the product market. Ultimately, as in the case of the U.S. automobile industry, the unfortunate scenario likely to unfold is one in which corporate restructuring reduces jobs.

It is true that labor unions have had the positive function of strengthening workers’ bargaining power, improving wages and working conditions, increasing job satisfaction, and thereby contributing to productivity gains across the economy as a whole.

Nevertheless, a one-sided strengthening of union power could just as easily produce dysfunction, as seen in the earlier example of the U.S. automobile industry. Moreover, given that the current situation is one of economic slowdown caused by the COVID-19 crisis, now is not the time to discuss ratification of ILO core conventions that would bring confusion to the labor market.

If union members also remember that, in their homes, they are consumers who search online for affordable products with good value for money, then this is all the more a time when it is important to create a forum where businesses and workers can cooperate so that both can thrive together.

Heonjae Song

Professor, Department of Economics, University of Seoul

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Original title: 해고자도 노조가입? 미국 자동차산업 망한 길 따라가나

Author: Heon-jae Song

Date: 2020-07-23

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=20&idx=22950