EXECUTIVE SUMMARY
The National Labor Relations Act of 1935 marked a
major departure from common law principles, which
were modified but not rejected with the passage of
the Taft-Hartley Act in 1947. Since that time, the
legal regime governing labor relations has been relatively
stable. Today, the looming presence of the Employee
Free Choice Act of 2009 (EFCA) threatens to alter
that balance radically. The EFCA seeks in a few short
paragraphs to erect a labor regime whose untested
provisions and coercive power will add countless business
casualties to our already suffering economy.
Labor unions claim that the unfairness of our labor
law has led to a decline of union membership in the
private sector from a high of 35 percent in the mid-1950s
to about 8 percent today. The stable labor law regime
is not the source of that decline, which is attributable
to other factors:
1. Globalization. The general liberalization
of trade over the last sixty years has undercut
the price structure of unionized firms facing foreign
competition. Workers will not join unions that cannot
deliver supra-competitive wages.
2. Labor mobility. Increased job switching
in the United States has compromised the position
of unions. Workers who do not expect lifetime employment
will not invest heavily in union activity.
3. Internal governance conflicts. Under intense
competitive pressures, senior union workers used
two-tier wage systems that have undermined the loyalty
of younger workers.
Management’s unfair labor practices are not
a significant reason for unions’ decline. Unions
win a majority of elections but typically in units
of 100 or fewer workers. These new workers cannot
replace the hundreds of thousands of jobs lost through
attrition when unionized firms cannot compete successfully
in an open economy.
Nonetheless, unions hope through the EFCA to ramp
up their organization by seeking higher penalties
against management that campaign in opposition. Far
more significant are the “card check” certification
procedure that bypasses the secret-ballot election;
and a new and undefined compulsory arbitration system
that would allow government arbitrators appointed
by the Federal Mediation and Conciliation Service
in the Department of Labor.
Card check. Under current law, a union that
gets 30 percent of the workers to sign cards can
demand a union election by secret ballot (almost
always within sixty days). Under the EFCA, a union
that collects cards from a majority of workers is
recognized—no questions asked. Without the
protection of a secret ballot, workers are exposed
to union intimidation. Yet the EFCA provides no
supervision on how unions collect, keep, or use
signed authorization cards. And by design, the EFCA
does not allow a card check to displace an existing
union. Nor may the employer use the card-check procedure
to decertify a sitting union. It is a one-way ratchet.
Compulsory arbitration. Under existing labor
law, union-management contracts necessarily result
from detailed and complex negotiations. Under the
EFCA, if a contract is not reached after ninety
days of negotiation and thirty days of mediation,
the dispute is referred to a panel of arbitrators
selected under yet unwritten procedures to be crafted
by the Federal Mediation and Conciliation Service.
The EFCA places no limits on the arbitration panel’s
discretion, and its decision would be binding—without
any substantive judicial review—for two years.
As constructed, the “free choice” act excludes
workers from two areas vital to their welfare: union
selection and contract ratification. Its compulsory
arbitration structure introduces a partial but large-scale,
covert government takeover of the private sector.
As America faces imploded financial markets and the
highest structural unemployment in a generation, the
EFCA is a misguided law that it cannot afford.
ABOUT THE AUTHOR
Richard A. Epstein is the James Parker
Hall Distinguished Service Professor of Law at the
University of Chicago and the Peter and Kirsten Bedford
Senior Fellow at the Hoover Institution. For the past
two years, while serving as a visiting professor at
the New York University School of Law, Professor Epstein
has been a visiting scholar with the Manhattan Institute’s
Center for Legal Policy.
Professor Epstein is known for his research and writing
in a broad range of constitutional, economic, historical,
and philosophical subjects. He has written many influential
and popular books; he edited the Journal of Legal
Studies (1981–91) and the Journal of Law
and Economics (1991–2001); he is the editor
of Cases and Materials in the Law of Torts
(8th ed. 2004); and he has written a one-volume treatise,
Torts (1999). In 2005, Professor Epstein was
named by Legal Affairs magazine as one of the twenty
leading legal thinkers in the United States.
Professor Epstein received a B.A. degree in philosophy
summa cum laude from Columbia in 1964. He received
a B.A. degree in law with first-class honors from
Oxford University in 1966 and an LL.B. degree, cum
laude, from the Yale Law School in 1968.
NOTE
This white paper is adapted from an October 21, 2008,
speech delivered at the Manhattan Institute, where
Professor Epstein was a visiting scholar in autumn
2008. Audience questions and Professor Epstein’s
responses at that forum have been preserved.
In this revised and expanded version of the original
lecture, Professor Epstein has updated his remarks
to reflect developments that took place after the
talk was initially delivered. It should also be noted
that the earlier bill has been reintroduced into the
Senate on March 10, 2009 as H.R. 1409. Professor Epstein
would like to thank Kayvan Noroozi of the University
of Chicago Law School, class of 2009, for his helpful
editorial assistance on an earlier draft of the paper.
FOREWORD
Our nation faces a financial implosion, a deep and
worsening recession, and government deficits unprecedented
in peacetime. Into this economic morass comes the
Employee Free Choice Act (EFCA), a piece of holdover
legislation from the last Congress that was reintroduced
on March 10. As University of Chicago law professor
Richard Epstein explains in this paper, the EFCA would
force more firms into bankruptcy and dramatically
discourage entrepreneurship, a perverse outcome that
“is not part of anyone’s economic stimulus
package.”
The extent to which the EFCA is a radical departure
from existing labor law is little understood. Unfortunately,
the public discourse has focused on the “card
check” provision of the legislation without an
adequate grasp of the EFCA’s provision for compulsory
arbitration. In essence, the proposed law would place
all elements of employment contracts—wages, hours,
vacation time, health benefits, promotions, work assignments,
termination decisions, even corporate mergers—under
the thumb of government appointees in the Department
of Labor, for at least the two years specified in
the statute.
The EFCA is fundamentally unfair. As Professor Epstein
notes, the EFCA’s title itself is an ironic misnomer:
the legislation would effectively eliminate choices
that employees are guaranteed under existing labor
law—namely, the right to certify a union through
secret-ballot elections as well as the right to ratify
or reject employment contracts.
In addition, the procedural gaps in the EFCA are
staggering: it offers no rules for determining who
will serve as an arbitrator, no rules delimiting the
arbitrators’ powers, and no possibility for appeal
from arbitrators’ judgments. Moreover, as Professor
Epstein explains:
Nothing about the EFCA coordinates the decisions
of different arbitrators to ensure that they issue
consistent decrees. And nothing requires them to take
into account the systemwide dislocation of their decrees.
The risk, therefore, is that a few union arbitral
decrees will exert an influence that goes far beyond
the card-check units to cover other workers who have
chosen to remain nonunionized.
The system of labor-management relations proposed
in the EFCA is unprecedented. Other countries have
card-check procedures (and consequent “economic
sclerosis”) but not compulsory arbitration. Public
employees have compulsory-arbitration procedures,
but as Professor Epstein observes, “those public
contracts are not efficient, to say the least—not
for their service assignments or for the generous
pensions (full pensions after twenty years of service)
that threaten the solvency of the system.” Moreover,
private companies, without the power of taxation,
face a far more complex competitive dynamic:
[B]usinesses either adapt and expand, or they die.
They must worry about the introduction of new product
lines and about acquisitions, mergers, takeovers,
and successor liability. There is absolutely no precedent
in the public sector on how to respond to these common
challenges. No set of arbitrators, unversed in the
details of any of the businesses that are unionized,
could begin to grasp which contracts would allow the
firm to survive and which would drive it under.
Even without compulsory arbitration, we would expect
the EFCA to have an adverse effect on employment.
Professor Epstein cites research indicating that each
percentage increase in unionization leads to a 0.35
percent increase in unemployment. The EFCA would thus
cause unemployment to increase by as much as 3 percentage
points in the first couple of years, even without
accounting for the unknowable but negative employment
impact of the arbitration provision.
At a time when our economy faces its direst prospects
in at least a generation, the EFCA is peculiarly unwise.
As Professor Epstein observes, “the persons most
likely to be hurt by these prospective changes are
ordinary working men and women who are struggling
to keep their toehold in the middle class.” Let’s
hope that our legislative leaders heed his words of
caution.
James R. Copland
Director, Center for Legal Policy
Manhattan Institute for Policy Research
----------------------------------------------------------------------------------------------------------------------
LABOR DISCOURSE TODAY
Let me open with this sobering thought: these are
not happy times for those of us who espouse to classical
liberal ideals. It is quite clear from the recent
presidential election that all the political tides
are moving in the opposite direction. Mine is, at
most, a feeble effort to hold back the hinged finger
of fate by raising practical and theoretical arguments
that go against the dominant ethos. I hope my effort
will work, but I am not quite sure what the outcome
will be.
My assigned topic for this lecture is the Employee
Free Choice Act (EFCA), a short statute that is set
out in full in the Appendix. The EFCA is, to large
extent, a misnomer. But I think it’s a mistake
to start off by trying to analyze, positively or negatively,
any particular statute. It is much more productive
to set out a framework of analysis, which, in this
instance, should allow people to understand something
about the evolution of labor law in the United States.
It is then possible to see clearly just how far the
EFCA deviates from sound principles of labor relations.
Most people, when they encounter the subject of labor
relations, take it as a self-evident truth that we
should begin with the National Labor Relations Act
of 1935 (NLRA),[1] as amended
by the Taft-Hartley Act of 1947.[2]
These two landmark statutes, taken together, set out
the basic framework of American labor law as it has
operated for over sixty years in the United States.
Most observers believe, and I agree, that the judicial
changes in this legislation over that period have
been minor.
To bring home this point, I often start with an image
of this labor legislation by analogy to a football
field. Imagining that the ball is initially placed
in the middle of the field on the fifty-yard line,
we can gauge how far the courts have moved the law,
in both distance and direction. If you performed this
exercise with the Civil Rights Act of 1964,[3]
the courts have moved the ball in one direction, into
the “red zone”—between the twenty-yard
line and the goal line—from the huge expansions
in coverage under the law.[4]
If you performed the same exercise with respect to
the labor law, you will find that the ball is still
located in the middle of the field, between the two
forty-yard lines. Whatever the huge social and economic
changes in the role of unions, few, if any, of them
can be laid on the doorstep of the court.
But the NLRA and Taft-Hartley Acts did, in fact,
usher in an enormous change in the organization of
American labor relations. I think that these changes
were unambiguously for the worse. So I’m going
to step back to an earlier age to discuss the common
law of labor relationships, in order to set the stage
for my critique of the modern law as it now stands,
and a fortiori of the changes that the EFCA
would make if enacted.
THE COMMON LAW OF LABOR RELATIONS
The first point to understand about the common law
of labor relationships is that there was no common
law of labor relationships, as such. Essentially,
the relevant common law rules governing employment
relations were notoriously impersonal in the sense
that they did not single out labor relationships for
any special treatment. Thus, the common law had rules
that governed the relationships between two parties
to a contract, which spoke about the position of promisors,
promisees, and so forth. These parties were A and
B, and the governing rules consciously did not take
into account the abundant differences with respect
to their wealth or social status. The ultimate question
is whether this much-debunked flight to abstraction
produces better or worse rules than a self-conscious
effort to create a law of labor relations as such.
And just what are the common law’s general and
impersonal principles, which must be understood before
they are criticized? The first principle, most critically,
is an endorsement of voluntary exchange in all productive
endeavors. These exchanges could arise in two different
ways. In some cases, such as partnerships, the roles
of the parties are symmetrical, so that it is difficult
to see how they could be skewed for the advantage
of one side at the expense of the other. But the situation
is somewhat more difficult in asymmetrical situations,
where the roles of employers differ from those of
employees, buyers differ from sellers, and lenders
differ from borrowers. The same logic of gain through
exchange applies to these relationships as well, but
here the default terms must necessarily reflect the
difference in initial positions. But it hardly follows
from this brute fact that the agreements are somehow
inefficient or that law cannot set up default terms
that grease the wheels of commerce, or that specific
terms for compensation and work should be imposed
by the state. The only real risk with voluntary arrangements
in these markets is that of monopolization, which
of course requires cooperation between parties on
the same side of the market, where workers historically
were at least as able to organize as firms. For this
issue, there are real antitrust concerns that manifested
themselves in the early common law rules against contracts
in restraint of trade and in some bellwether legislation
as the Sherman Act of 1890[5]
and the Clayton Act of 1914,[6]
about which I shall have more to say shortly.
That said, in an ordinary wage transaction, the terms
and conditions of employment would be regarded as
a matter for private negotiation. Most critically,
each side had the absolute right to refuse to deal
with the other side: if they could not come together
with some kind of accommodation, both sides were free,
and even obliged, to go their separate ways.
The theory behind this rule recognized that an employer
might exercise its right to fire, perhaps even arbitrarily,
to maintain its economic position. Yet at the same
time, the power to fire an employee at will was offset
because the worker had the same right to quit to protect
his position. The basic assumption was that the interaction
of these two threat positions would create strong
pressures for the parties to negotiate relatively
efficient contracts on the simple ground that arbitrary
terminations don’t generate gains for either
side. Only cooperation can achieve that result.
I believe that this common law approach is stunningly
correct. Just because the legal system is completely
impersonal in how it fashions its basic assumptions,
it doesn’t follow that the parties have to be
completely impersonal in how they fashion their private
arrangements. Without any prompting from the judges,
they can take into account such vital matters as workplace
safety and deferred compensation by agreement. Generally
speaking, they will try to come up with some combination
of terms and conditions that will save costs for both
parties. Once that efficient point is reached, they
can adjust the wage term to figure out how to split
the surplus between them. And if they do their sums
right, productivity will increase, which in turn will
give rise to increased raises because the quit threat
becomes more credible if other employers are prepared
to pay the competitive wage. As John Kennedy liked
to say, a rising tide raises all ships.[7]
The historical record more or less bears this account
out. The actual progress of labor contracts, wage
levels, and so forth in the pre-1937 period, with
the huge (government-driven) exception of the Depression,
shows these consistent trends. Wages moved upward,
and hours moved consistently down. This simple model
of joint gains through exchange works as well here
as in any other area.
Building this particular system involves several
other features that are worthy of notice. One of them,
of course, is the role of the antitrust constraint
in organizing the system. This constraint was recognized
from the outset of labor relations law, and rightly
so. Most critically, the strictures against monopoly
were applied evenhandedly to both sides. Employers
could not get together to form some kind of a hiring
cartel in order to reduce the cost of wages. The principle
is hardly novel. It represents, essentially, a prohibition
against horizontal restrictions on trade.
Historically, these rules were applied to the other
side of the market as well—that is, to labor
unions. This use of antitrust law to prevent cartelization
by both employers and employees represents the second
key general and impersonal principle of common law
labor relations. The most famous of these early cases
was the Danbury Hatters case, Loewe v. Lawlor,[8]
in which a labor strike—a secondary boycott—was
held under standard principles to be a collective
refusal to deal and therefore a per se violation of
the antitrust law. By the time the case had worked
its way through the courts, the individual participants
in the boycott were themselves held jointly liable
for the collective wrong in wrecking the target firm,
and judgment liens were placed on their property.[9]
Many people today shrink away from this result. But
I think that the judicial response was perfectly appropriate.
The common law’s third key institutional arrangement
is still more controversial. I use “yellow dog
contract” as a simple term of description, but
to most people in the labor movement it was a term
of manifest opprobrium. Its meaning is lost today.
When I ask my students what the yellow dog contract
is, most of them stare at me vacantly. They know it
sounds like something terrible. And so it was regarded
by unions, especially in the mines. Thus the United
Mine Workers had this to say about the contract:
This agreement has been well named. It is
yellow dog for sure. It reduces to the level of a
yellow dog any man that signs it, for he signs away
every right he possesses under the Constitution and
laws of the land and makes himself the truckling,
helpless slave of the employer.[10]
It is useful to deflate the rhetoric. Essentially,
what these contracts provide is that if you wish to
work for a particular firm, you have to agree not
to join the union during the period in which you are
employed by the firm. The sensible purpose behind
the provision was to assure the undivided loyalty
of the individual worker to the firm. And the key
point was not that the employer could not fire that
worker, or that the worker could not quit, because
both those options were always available. Rather,
the key advantage for the employer was that it was
now in a position to enjoin the union from inducing
a breach of contract if it tried to get people to
secretly join the union while they remained on the
job. This agreement, it must be stressed, has advantages
both ways. The worker can exact some premium for accepting
the condition. The firm has a greater expectation
of stability. And society writ large gets the benefit
of more competitive labor markets.
THE END OF THE COMMON LAW ERA
These key elements—the contract at will, the
antitrust laws, and yellow dog contracts—were
to the reformers of the New Deal period the poster
children of all that was wrong with the world. It
was therefore no surprise that the Progressives sought
actively to undermine these rules. Historically, it
is instructive to see how the transformation took
place.
The first transformative step came in the Clayton
Act of 1914,[11] which declared
with a great deal of passion that labor and agriculture
were not articles or commodities to be bought and
sold in the marketplace. Since they were not commodities,
labor unions, “instituted for the purposes of
mutual help,” were exempt from the antitrust
laws. That is, the act marked a self-conscious reversal
of the previous policy, which let collective action
by workers be subject to the Sherman Act.
By 1920, there was a question as to whether unions
could combine with firms in order to attack third
persons. The answer offered in the key case of
Duplex Printing Press Co. v. Deering[12]
was no. And that rule basically remains today. But
collective refusals to deal by labor unions on their
own do remain exempt from the antitrust laws.
The next element in the old synthesis that fell by
the wayside was the yellow dog contract. The Norris-LaGuardia
Act of 1932,[13] a Hoover piece
of legislation, decreed that these contracts were
against public policy and therefore unenforceable.
Employers concerned about dual loyalties were no longer
able to contract with their workers not to join a
union.
Only three years later, with Roosevelt in office,
Congress passed the National Labor Relations Act of
1935.[14] The passage of this
statute marked the clear consensus that labor unions
could not flourish in an environment that stopped
with neutralizing the antitrust laws and banning the
yellow dog contract. What was needed was an additional
mechanism to ensure that employers had a duty to deal
with unions. To decide which union was the appropriate
bargaining unit with which an employer had to negotiate,
the NLRA provided, quite explicitly, for a system
of representation elections. If the union won that
election, the employer had to negotiate with it in
good faith to attempt to reach some kind of contract.
All workers inside the union were bound by the union
agreement once it was ratified by a majority of workers.
Any previous contract arrangements that some union
workers had with the employer were displaced, and
the agreement bound all workers who had dissented
from the selection of the union. But the act itself
did make this key judgment: neither side was required
to make concessions to the other. So long as there
was no unfair labor practice, the want of agreement
did not expose either side to liability. There was
no system of compulsory arbitration to final “contract”
terms.
The Progressive model behind the NLRA reflected a
deep belief that democratic elections were the best
way to secure justice in the workplace. This new system
marked a conscious deviation from the earlier common
law view that required the consent of employer and
employee to make an agreement. Before the passage
of the NLRA, those workers who did not agree with
their employer were, of course, free to go elsewhere,
but there was no way that any group of workers could
bind dissidents to their program. The change effected
by the NLRA is profound because it marked—as
did so much legislation in the Progressive tradition—the
conversion of a competitive labor market into a monopolized
market. In fact, the new environment created by the
NLRA was, in a sense, worse than many other such reforms
because the statute created, by design, a bilateral
monopoly.[15]
This structure meant, in effect, that the employer
had only one union with which it could conclude any
business. Once appointed as a bargaining agent for
a particular firm, the union for its part had to target
this firm for the benefit of its members. The inability
for either side to opt out created constant bargaining
over wages and all the other terms and conditions
of employment. Bluffing and bluster are part of the
lengthy progress of negotiation. All sorts of disruptions—strikes
by workers, lockouts by firms—could follow when
the parties’ bargaining led to an impasse. Today,
it is not infrequent that unions that have won elections
to organize workers have been unable to reach a first
contract with the employer, because the employer wants
no part of a unionized arrangement.
I think it is very clear that major inefficiencies
are built in to the current institutional arrangement
under the National Labor Relations Act. The chief
problem is that when the law allows workers to organize
but doesn’t give employers the option to go elsewhere,
employers see in unions an unambiguous reduction in
the value of their firms. At this point, the way that
people behave when they feel threatened and attacked
is common knowledge: they resist, sometimes by lawful
means, and sometimes by unlawful means. It is possible
to see both these behaviors happening simultaneously
at any time.
The problem, however, is perfectly reciprocal. Just
as the firm feels threatened, the union sees a strong
need to get monopoly wages for its workers to justify
its victory in a union election. Unions, too, will
often resort to very strong tactics in organization
and negotiation—sometimes lawful, and sometimes
not. There’s no virtue in this particular war;
there is simply an effort by each side, by means both
fair and foul, to divide the potential gains in this
complex bilateral monopoly arrangement.
THE SOURCES OF UNION DECLINE
In analyzing our labor law regime, it is only natural
to ask: Who tends to win the contest between management
and labor in the long run? What we know is that labor
seems to have lost fairly seriously even though the
system gives labor all sorts of preferences relative
to the common law rule. Union membership in the private
sector has declined from about 35 percent in the mid-1950s
to a little over 8 percent today.[16]
Why should that turn out to be the case? On one point,
we can be sure: it is not because the statute or its
administration has changed. Rather, it is because
the dynamics of the marketplace have moved in ways
that are uncongenial to labor organizations not only
in the United States but worldwide.
Globalization. Let me mention a few
of the forces that have transformed labor markets.
The first of these is globalization. Basically, one
element of a strong union movement lies in its ability
to keep out imports from overseas. Without that protection,
the union cannot maintain its monopoly wage structure.
With tariffs and other trade barriers, the employer
can capture monopoly gains for its goods and services,
and the union can negotiate for a share of that surplus.
Any general liberalization of trade means that the
flow of foreign goods into this country can undercut
the price structure of unionized firms.
The most vivid illustration of globalization’s
impact on unions is the collapse of the American automobile
industry in the face of the onslaught of foreign competition.[17]
There are some learned disputes about the exact wage
differential between the unionized and nonunion firms;[18]
it may not be quite the thirty-dollar hourly differential
in worker pay that is widely reported,[19]
but no one doubts that Toyota and Nissan have huge
advantages over GM and Chrysler. That gap is simply
not sustainable.
Unfortunately for union workers, union contracts
preclude the quick wage flexibility that is needed
to bring domestic producers back into competition
with their foreign rivals. Without that necessary
wage flexibility, the carnage is self-evident. The
unionized automobile producers have lost more than
half a million workers in the last seven or eight
years,[20] all to attrition and
the closing down of plants. The current impasse will
increase those numbers, with or without the bailout,
the first steps of which were approved by the Bush
administration in December 2008.[21]
Those steps surely failed, and the more recent developments
have resulted in additional billions of dollars poured
into the GM bailout, where the only real question
is whether the firm will collapse before the additional
infusions are able to reverse the firm’s fortunes
at a time when automobile sales are everywhere in
sharp decline. The union structure always creates
an implicit conflict between older and younger workers.
Globalization shows that the younger generation comes
out the losers.
Labor Mobility. A second reason for
the decline of unions involves the increased level
of labor mobility. Job patterns today are very different
from what they were in earlier periods. Gone are the
days when workers at Ford’s Riva Ridge plant
thought that they could start work in 1932 and retire
from the same plant in 1962 or 1972. Today, the level
of labor turnover is far higher. People routinely
go back to school and retool for new careers and professions,
which compromises the position of all unions.
Here’s why: for unions to succeed, they have
to secure front-end investments in order to recover
long-term gains. That strategy becomes extremely difficult
to implement when labor mobility creates a free-rider
problem. Quite simply, the workers who have to bear
the organization costs today will not be able to hang
around to reap the benefits down the road. As rational
agents, therefore, they will cut back on these investments,
which makes the task of unionization more difficult
than it would otherwise be. This structural feature
does not depend on the organizational talents of key
union leaders. It simply means that able union workers
will plant fewer seeds because they will not be around
to reap the harvest years later.
Internal Conflicts of Interest. A third
reason for union decline reveals itself only over
time. Quite simply, like all other collective organizations,
unions can succumb to their internal conflicts of
interest. The most evident sign of this danger is
the two-tier labor contract. Older, established workers
receive the high wages worthy of their monopoly position.
The company responds that it cannot afford to keep
this wage structure generally. The union agrees with
the global assessment, but it cannot persuade its
existing members to accept deep cuts. So the deal
that the parties reach lowers wages for the new workers,
who, after all, do not have any monopoly power over
the firm. Today’s workers, in effect, sell out
the next generation for their own convenience. But
in the long run, the next generation of workers who
are hired will not be as loyal to the union as the
earlier members were. The long-term consequence is
a weakened union structure.
In general, unionization has yet another cost that
is harder to pinpoint. Unionization changes the mentality
and outlook of the management team. Innovation and
marketing take a backseat to the toughness that is
required to negotiate union contracts, which threaten
to capture a large portion of potential gains from
innovation. And the management that hunkers down on
labor relations may well be less adept in operating
in a market environment that is far more fluid. The
constant need to monitor labor contracts in the face
of institutional inflexibility induces management
to hire “tough guys with an attitude,” with
a suspicious mentality whose basic instinct is to
say no to new ideas. In its own way, the choice of
institutional structure undercuts the dynamics of
the entrepreneurial firm.
It is important to note one item that I did not place
on the list of reasons for unions’ decline: the
role of management’s unfair labor practices in
snuffing out unionization efforts. Number one, most
of the union losses come from attrition of workers
in existing units. Jobs are lost because the unionized
firms cannot compete in an open economy, as the experience
in the automobile industry shows. Equally instructive
is the situation on the organization side. Here union
supporters are often careless insofar as they do not
distinguish those management practices that are illegal
from those that are effective.[22]
The whole point of an election campaign is to sway
employees with arguments.
Nor does the overall picture change if we look at
the relevant statistics. The number of workers who
participate in union elections every year is about
200,000. Unions win about half those elections.[23]
Management can do nothing to forestall an election
if the union is able to collect cards from 30 percent
of the workers. The number of elections is shrinking
because unions have concluded that their chances of
success are not great enough to justify more effort
in this regard. Indeed, in many cases, the preferred
union strategy is to engage in various public events,
such as picketing and protests, to persuade employers
to allow representation to be secured by card check.
In those cases, moreover, where the union is able
to organize, it’s not clear that the unions actually
get contracts. And even when they do win contracts,
it’s not clear whether those businesses expand
or contract. What is clear is that the inflow is not
sufficient to offset the losses, which in the automotive
industry alone totaled over 500,000 jobs, before the
recent convulsions.[24] If you
look at a study of unionized and nonunionized firms
in the same industry, the growth is always far greater
in the nonunionized than in the unionized sector.
When it comes to unions, it is not only the wage
differential that matters; it is also the unionized
firms’ relative lack of flexibility in the workplace.
The anecdotes about particular union elections do
not matter in the long run. What matters is the unyielding
underlying economics. As nonunionized firms expand
in the marketplace for all these reasons, we observe
a decline of unions. If union penetration in the private
sector was 35 percent in 1955, it has fallen to an
8 percent penetration a half a century later. It is
only public unions, which are a completely different
kettle of fish, that have kept the ranks of union
population up, chiefly through legislative orders
that require public entities to bargain with them
or submit to card checks that make recognition campaigns
easier.
THE EMPLOYEE FREE CHOICE ACT
What do unions want to do about the current state
of affairs? The first thing they want to do is maintain
the illusion that employer unfair labor practices
are the cause of the decline in the union movement.
In making this one-sided claim, they ignore all the
tough-guy tactics that some unions use in various
cases to organize, and they concentrate exclusively
on the other side of the equation. With this background,
let’s turn to the specifics of the EFCA.
Employer Unfair Labor Practices. The
least controversial—although misguided—provision
in the EFCA is the one that boosts the fines and sanctions
on employers who are found to resist unfairly the
organization efforts of unions. The EFCA also provides
that these cases be given a first priority inside
the National Labor Relations Board (NLRB). There is
no analogous provision that would equally subject
the unfair labor practices of unions to similar sanctions.
The obvious effect of these provisions, even if nothing
else changed, would be an increased reluctance of
employers to resist unionization campaigns. That change,
in turn, would make employers increasingly willing
to sign so-called neutrality agreements, whereby the
employer agrees to remain silent during an organization
campaign. The impact of such neutrality would be heightened
under the new statutory regime, which, as we will
see, permits such campaigns to be decided not by a
secret-ballot election but by a card-check system,
in which the union will become the bargaining agent
if it presents the right number of signed authorization
cards to the NLRB official in charge of the case.
The Card Check. The newly heightened
penalties for employers engaging in unfair labor practices
is only the opening salvo in the EFCA’s three-pronged
attack on traditional employment law. The much more
controversial provisions in the EFCA are the card-check
and the compulsory arbitration provisions. It is,
moreover, the synergy between these two provisions
that threatens to transform American labor law.
Right now, in order for a union to gain recognition,
it must begin with a card check of sorts. More specifically,
ordinarily the union must get 30 percent of the workers
in a “designated bargaining unit”—itself
a term of art—to sign cards. Those cards then
set the stage for a union election, which usually
takes place shortly thereafter. Some 95 percent of
elections take place within sixty days after the requisite
cards are presented.
During that election period, the employer can bring
out the heavy artillery. Employers can call the workers
in for special sessions—they have to pay them,
of course, for the time—and tell them, by way
of prediction but never by way of threat, exactly
what is likely to happen to them if they decide to
unionize. And they have a strong message to present.
More than one employer could point to some plant across
the river that had 5,000 workers before employees
unionized in 1999 and now is virtually about to go
under. The employer can steer clear of unfair labor
practices by predicting that it will not be able to
remain in business—at least at the present levels—if
the union wins the election, even if it takes every
measure to avoid the same fate. After all, there is
another plant down the river, or outside the country,
which has not been unionized. It can easily woo away
customers with better products sold at lower prices.
Union representatives bitterly resent these campaigns.
They do not even care whether they are legal or illegal
under current law. What really troubles them is that
these campaigns are effective in altering the sentiments
of workers. I think that it is far better to regard
such employer tactics as, in essence, part of a full-information
operation: let both sides speak their piece so that
the workers can decide.
In fact, the current labor law rules give the union
an advantage, both over the employer and in relation
to the old rules of the common law system. Unions
are free to make predictions, threats, and promises
to their heart’s content, so long as they do
not threaten the use of force. But the employer’s
rights are fewer than they were at common law, where
it could routinely make any threat to commit any lawful
act, including shutting down a plant or moving it
to a new location. And, of course, firms could have
always promised workers benefits if they stayed out
of unions. But a promise of higher wages or increased
vacations in the face of a union campaign is now regarded
as “coercive” speech and thus lies outside
the scope of First Amendment protection. Everything
about union law is at odds and angles with respect
to the general law, and freedom of speech is no exception.
The card-check procedure that unions seek today no
longer serves as a prelude to a secret-ballot election.
Under the EFCA, card check serves as a prelude to
compulsory arbitration. Under the proposed regime,
the percentage of cards needed goes up to 50 percent
plus one. But the payoff is far greater: automatic
recognition. The entire process is rife with potential
for serious complications and abuse.
The first problem is the so-called snapshot problem.
Envision a situation in which the union asks a worker
eight times if he wants to join the union or to sign
the card. Seven times the worker says no, and one
time the worker says yes. The only time that matters
under the new system is the time that the worker says
yes. It does not matter whether it was the first time
or the last time or any time between. The other seven
times that the worker said no simply do not matter.
The blunt truth is that the worker will not be allowed
to revoke the card after it has been signed. So once
the card is in, the worker is bound for some period,
which is left unspecified under the act but likely
to be about six months. It’s as though, for example,
the law staged an election in which voters could commit
to one party but not to the other. Any card-like commitment
not to join a union is of no effect.
Workers commonly sign cards under the current system
because they know that they can vote the other way
in the secret-ballot election. Hence it often happens
that unions cannot convert a majority of signed cards
into an electoral victory. The explanation is that
workers, who may be approached at all times of day
and night, are afraid of union intimidation. They
will sign the card because they still have the protection
of the secret ballot under NLRB elections. The EFCA
takes away that safeguard.
Worse still is that the EFCA provides no supervision
for the way in which unions gather their signed authorization
cards. The union can get a card anywhere, any time.
The only challenge to the signed card after the fact
that enjoys any chance of success is a charge of forgery—the
worker did not sign the card. In principle, an employer
might like to challenge a signed card on grounds of
fraud or misrepresentation. But we know from the history
of public unions in places like Illinois that this
theoretical ground for rejecting a card has no chance
of success. I know of no case in which the employer
was able to meet the heavy burden of proof needed
to invalidate the card.
Of course, when the union is selected, the card check
no longer matters. As with general elections, the
union stays in power even if the workers who signed
the cards are gone within a week or two after the
union was designated. Under current law, the first
contract generally raises a bar against a reelection
for another three years, or the duration of the contract,
whichever is shorter. The EFCA lets the first contract
imposed through arbitration last for two years. To
understand why this fixity is especially dangerous
for small businesses, imagine a firm that has only
twenty employees when the union is designated. If
the firm now wants to expand to 200 employees, the
other 180 workers are bound to a union contract over
which they had no say.
My fear is that the risks of card checks will not
go unnoticed by entrepreneurs. Once they understand
their exposure to the card check, they will become
bearish on forming new businesses. Just when a firm
is seeking to get its credit line in order, to decide
on its product mix, and to put its management team
together, the union comes knocking and labor issues
move to the head of the queue. Who needs it?
An additional risk of the card check is that the
union can collect the cards in secret, for the EFCA
imposes no obligation to broadcast that the campaign
has begun in earnest. It is therefore permissible
for the union to turn quietly to those workers in
the plant whom it thinks are sympathetic to its goals.
It then gets them to sign on the sly. Once the cards
are collected, the union can figure out the bargaining
unit that maximizes its power and present its request
for recognition to the NLRB. The entire process can
take place without a single word of public debate.
It is not only the employer who does not speak. It
is also workers who are denied a chance to participate
in collective deliberation of the sort that is consistent
with the model of union democracy that drove the original
Wagner Act.
Moreover, the EFCA itself contains an ironic confirmation
of the power of the card check. The act sets out only
two circumstances in which the card check is off limits.
The EFCA does not allow a card check to displace an
existing union. For that, the NLRB has to run the
traditional election. Nor may the employer use the
card-check procedure to decertify a sitting union.
For that, too, the law continues to require a secret-ballot
election. Essentially, the EFCA creates a one-way
ratchet whose sole object is to maximize the gains
to union-organizing campaigns.
Compulsory Arbitration. What happens
when the union gets the needed cards? It’s quite
an astonishing process. Anyone who has ever looked
at a collective bargaining agreement knows that they
are organized against a backdrop of massive distrust
between the sides. To counter the risks of breach,
both sides set out the terms of the agreement in extreme
detail. Negotiation of such a contract is a tedious
and complex process. Typical collective bargaining
agreements can be several inches thick because no
one wants to trust the good faith of the other side
on such mundane matters as personal sick leave and
vacation pay, let alone such big-ticket items as pensions
and health-care coverage. So these contracts become
extremely ornate, and they are multidimensional. Often,
the parties trade off the menu of health plans with
the amount of vacation pay and so forth. There are
no short cuts to success.
The way bargaining works under the EFCA will be quite
different. The dominant constraint is that there is
no exit. The EFCA allows ten days before negotiations
are supposed to begin—that’s all the time
that is allowed to cover all the preliminary negotiations
of the sequence of meetings, the exchange of information,
and numerous other tasks that in large negotiations
take far longer. Next, there are ninety days before
a mediator is appointed. After thirty days of mediation,
the case goes to compulsory arbitration. Who is going
to be the arbitrator? We do not know from the statute,
which only states that a panel of arbitrators shall
be appointed in accordance with rules that shall be
set out by the secretary of labor or, more precisely,
by the person who is in charge of the Federal Mediation
and Conciliation Service (FMCS).
Yet nothing in the EFCA determines whether each side
picks one arbitrator and the two arbitrators then
settle on a third, or whether each side picks one
arbitrator and a government official in FMCS supplies
the third arbitrator. It is a serious risk in an Obama
administration that a firm could face a panel chosen
by someone formerly from the Service Employees International
Union (SEIU) who is appointed to a key position on
labor negotiations.
Union representatives counter that it is always possible
for firms to avoid the risks of arbitration by reaching
an agreement earlier in the process. But the firm
that has to bargain in the shadow of the law gains
only modest respite from this tactic. The union that
knows the landscape will not take little in settlement
if it thinks that it has much to gain through arbitration.
It therefore will push as hard in negotiations as
it will before the arbitrator. If there is a strong
pro-union arbitration panel, the firm will, at best,
get highly disadvantageous terms either way. The firm’s
bargaining position depends entirely on the composition
of the arbitration panel, and the EFCA critically
fails to address this question or to protect against
bias.
Is there any other form of relief for an employer?
Not really, except for going out of business; the
EFCA contains no provisions to deal with bankruptcy.
The EFCA allows neither side judicial review on any
aspect of the first contract negotiation. The employer’s
only review is limited to formal procedural matters,
such as whether the negotiations took place for more
than ninety days. The substantive terms imposed by
the arbitrator are not subject to review for arbitrary
and capricious misbehavior. The arbitral decree is
final on the merits.
So why do we put such faith in arbitration? The union
defenders note, with a great deal of confidence, that
this form of interest arbitration is already used
in the public sector for schools and other kinds of
unions. What, they ask, is the big deal? Well, there
are two big deals, each of which requires a sentence
or two of comment.
First, any analyst has to be confident not only that
arbitrators can impose agreements but also that these
agreements make sense economically. So if neutral
observers think that the New York City union arbitrations
lead to efficient and sensible teacher, sanitation,
or police contracts, they might be willing to extend
the practice. But those public contracts are not efficient,
to say the least—not for their service assignments
or for the generous pensions (full pensions after
twenty years of service) that threaten the solvency
of the system. Public union contracts are hardly a
model for labor contracts against firms that lack
the power of taxation.
Second, the union contracts in the public sector
do not have to cope with the realities of a dynamic
marketplace. No one would ever attempt to reorganize
the New York City school system or its transportation
network if burdened with the city’s existing
union contracts and the restrictive practices that
they embody. Yet businesses either adapt and expand,
or they die. They must worry about the introduction
of new product lines and about acquisitions, mergers,
takeovers, and successor liability. There is absolutely
no precedent in the public sector on how to respond
to these common challenges. No set of arbitrators,
unversed in the details of any of the businesses that
are unionized, could begin to grasp which contracts
would allow the firm to survive and which would drive
it under. And these firms cannot rely on the generosity
or self-restraint of unions to keep them from going
over the brink. The calculations are too complex to
be done with any accuracy. Witness the ability of
the UAW to kill the goose that lay the golden egg
in the auto industry.
Consider a few explosive issues, such as job security.
I see nothing in the EFCA indicating that the arbitrator
cannot impose a term saying that the firm cannot fire
any workers, regardless of financial conditions, for
the first two years. Next, what about subcontracting
out to efficient third parties, including overseas
firms? The arbitrator can block all such initiatives
that affect union workers. It looks as though anything
that is a mandatory subject of bargaining is subject
to arbitral decision. That list of terms and conditions
of employment is not infinitely elastic, but it is
very large. The standard management rights clause
in all labor contracts is a subject of mandatory bargaining.
As such, the arbitrator can reject it in any or all
cases. Again, this outcome would not be subject to
judicial review. Likewise, if the contract goes against
the workers, they cannot reject it. The “free
choice” act essentially excludes workers themselves
from the two areas where their participation is most
critical under the NLRA: union selection and contract
ratification.
THE SUMMING UP
It is time to put the EFCA’s whole package together
so that it can be studied in light of the general
theory of the firm. Step one is the successful card-check
campaign. Once the union signs up 50 percent of the
workers in some designated unit, it has a lien on
a very substantial chunk of firm assets by virtue
of the compulsory arbitration procedures. The closest
parallel here is the Railway Labor Act of 1926 (RLA),[25]
which provided that work rules could be changed only
with the mutual agreement of labor and management.
In effect, that long-term contract gave workers a
lien on the assets of the firm, which had to be bought
out by management. And so it was that the airlines
(covered by the act since 1936) could escape their
labor obligations only by giving their unions a piece
of the business. The power of the union here depends
on the extent of its leverage. Under current law,
a union cannot force a firm to agree to compulsory
arbitration after the expiration of the current agreement.
That conclusion holds even if the initial contract
provides that arbitration is required for the next
period. If that conclusion is carried over, as it
should be, to the “first contract” under
the EFCA, the period of mandatory agreements should
last only two years. But the new statute does not
explicitly say that the first contract cannot require
compulsory arbitration in the second period, so it
is possible that once the firm is shackled in the
yoke, bankruptcy and liquidation afford the only releases.
It should be apparent that I have nothing kind to
say about the proposed statute. People ask if this
makes me anti-union; I suppose, in some sense, the
answer to that question is yes. But I think that’s
the wrong way to phrase the situation, for it misses
the true question, which is why a set of legal institutions
discharges the social task of figuring out a legal
regime that will maximize the joint surplus of employers
and employees through their cooperative ventures.
Unions, of course, may benefit most of their workers.
But they do nothing for those unrepresented workers
who are shut out of the system. For the overall assessment
that takes into account all workers, and all firms,
both present and future, it turns out that there is
nothing that beats open competition. What is true
for product and financial markets applies as well
to the labor cases.
The implications of this position are clear. The
NLRA, to the extent that it deviates from a competitive
model by trying to create this top-heavy democratic
model in its place, was a mistake. But it’s the
kind of mistake with which we have learned to live
through adaptive behavior, and a mistake whose force
has been blunted over the years by the confluence
of events to which I referred: globalization, labor
mobility, and internal governance conflicts. There
is, however, no similar comfort level for dealing
with a new double-barreled regime that sports a card
check leading to compulsory arbitration. The learning
curve will have to be steep if we are to avoid as
a nation more structural unemployment in a world that
since October 2008 has witnessed an implosion in financial
markets that threatens to sweep ever more broadly.
There are enough firms in or near bankruptcy for all
sorts of reasons. We do not need to impose a labor
regime whose novelty and coercive power will only
expand the roster of failed firms. The possibility
of a quick trip into Chapter 11 is not part of anyone’s
economic stimulus package.
The prospects for established firms are scarcely
better. Take any large retailer with a thousand stores,
and ask what happens if different unions represent
workers in different trades in the outlet or the same
outlets in different stores. Nothing about the EFCA
coordinates the decisions of different arbitrators
to ensure that they issue consistent decrees. And
nothing requires them to take into account the systemwide
dislocation of their decrees. The risk, therefore,
is that a few union arbitral decrees will exert an
influence that goes far beyond the card-check units
to cover other workers who have chosen to remain nonunionized.
What happens next is anyone’s guess.
We do not need a mastery of the particulars to explain
the risks that we court if the EFCA becomes law. I
regard this law as a kind of large-scale, covert socialization,
or government takeover, of the private sector. By
mimicking the compulsory arbitration of the public
sector, we introduce a version of civil service employment
for industry. How this element will transform business,
no one can say for sure. The best result is to inter
the EFCA for the duration in order to avoid further
mischief in labor relations.
I hope that I have achieved my initial objective,
which is to make all of you, regardless of your position
on the political spectrum, uncomfortable about the
EFCA. But we have to face the grim realities, given
that a majority of Democrats, including President
Obama, have signed on to this program. Unfortunately,
the public debate has chiefly centered on the card-check
provision and has thus glossed over the synergistic
risks when it is married to a program of compulsory
arbitration.
The risks go further. The modern conception of the
labor contract is that of an agreement that cries
out for legislative interference. On that score, we
need to see the EFCA in connection with a raft of
other new provisions that will also place additional
pressure on labor markets: an expanded family-leave
program, a more aggressive disability regime, and
the more vigorous enforcement of the employment discrimination
laws. The heart of commerce cannot beat forever when
it is burdened with multiple restrictions. Let the
costs of regulation exceed the anticipated gains from
trade, and the labor relation closes down.
The persons most likely to be hurt by these prospective
changes are ordinary working men and women who are
struggling to keep their toehold in the middle class.
Lawyers like myself are likely to do quite well sorting
out the well-intentioned turmoil created by those
modern intellectuals and politicians who somehow cannot
accept that voluntary contracts, and only voluntary
contracts, generate gains from trade. The worrisome
issue of our time is whether such gains will be smothered
in yet another layer of misguided government regulations.
* * *
QUESTIONS AND ANSWERS
Globalization
QUESTION: Surely the creators of this act cannot
just will away globalization, which is now a fact
of life. Or am I wrong?
PROFESSOR EPSTEIN: No. Globalization is a fact of
life, but you have to understand where it exerts its
greatest influence. Globalization may make this program
of aggressive unionization fail with respect to manufacturing,
unless we get high tariffs. But imagine yourself in
one of the following trades where globalization is
a second-order effect: a restaurant, hotel, retail
outlet, or reception office in a large hospital. In
those cases, where you have to have people who are
on the ground, the substitutions away from union labor
are going to be limited.
If everyone else is subject to the same restrictions,
the competitive advantage of being nonunion will be
great. But that competitive advantage is short term,
for every firm is going to prove vulnerable. There
are at least enough short-term rents in this fluid
environment that unions like the SEIU will project
their ability to gain 1 or 2 million members over
the next couple of years.
Globalization does not ensure that these groups cannot
succeed, at least in the short run. Rather, the correct
argument is that when they do succeed, it will result
in a general comparative disadvantage for labor in
the United States relative to everywhere else. So
if American hoteliers trying to compete in the world
markets to get folks to come to their hotels face
a wage structure that is no longer competitive with
that in Cape Town or Bangkok, such American businesses
will start to lose out on that growing slice of the
market. Unfortunately, the happy warriors who are
behind the EFCA do not believe that indirect or unforeseen
consequences are things to worry about.
Instead, the objective of the EFCA’s proponents
is to obtain what they see as the just result in income
distribution in the short run. They hope, vainly,
that all the production issues will take care of themselves.
Since they are still infused with the Progressive
mind-set, they really don’t believe, in general,
that unions have ever had an adverse effect on productivity.
Stated otherwise, they start from the highly influential
Freeman and Medoff tradition,[26]
which finds certain efficiency advantages in unionization.
That academic cover lets them proceed as though they
can have their cake and eat it, too.
European Card Check
QUESTION: Did you mention that this card-check system
is in place in Europe?
PROFESSOR EPSTEIN: The card check is used in some
places outside the United States. It’s also used
in some places inside the United States. And several
Canadian provinces experimented with various permutations
of card check and compulsory arbitration for different
periods of time. The empirical difficulties in measuring
their consequences are not trivial, but the best estimates
of which I am aware are by Anne Layne-Farrar at the
Law and Economics Consulting Group (LECG), where I
am an affiliate. The bottom line of Layne-Farrar’s
work is that for each 1 percent increase in unionization,
we can expect a 0.35 percent increase in unemployment.[27]
In the public sector, both these elements are in
use. What is interesting about the public-sector arrangements
is that in order to deal with the openness of potential
terms, the governing statutes usually contain fairly
detailed lists that indicate which factors the arbitrator
has to consider in figuring out the wage and other
contract provisions. These arbitrators also have previous
contracts to update. No one starts from scratch. But
as I said, these precedents count for naught in dynamic
industries where no precedents are available. Most
critically, the heterogeneity among firms in the same
line of business is absolutely enormous. And one thing
that is vital to preserve in dealing with private
enterprises is their diversity. Let FreshDirect work
by one model and Peapod by another. Even if both deliver
groceries to people, each of them has a completely
different strategy as to how to run the back end of
its business. The last thing that any labor arbitrator
should be able to say is: “Well, you know that
Peapod does it this way. Okay, Web Van, you now have
to follow suit.” I am frightened that if arbitrators
talk to one another, they could dictate a single management
strategy for all firms in the same industry.
We already follow that pattern in the public sector,
and what happens is evident. There is essentially
very little competition between unionized school districts
in rival areas because they are all subject to the
parallel legal regimes imposed through the same process
of arbitration. To avoid this, I think that we have
to take a leaf from Calvin Coolidge on municipal unions.
To secure competitive governments at the local level,
we must remove state mandates that require every local
government to recognize unions for all forms of public
works. If anything, they should be able to stipulate
that they will not deal with unions, so as to introduce
a healthy measure of competition across local government
lines.
I do not take any comfort from the EFCA by looking
to Europe, with its own form of economic sclerosis.
Nor do I accept the common accusation of people who
have never been in business that anyone who has earned
an MBA is a dolt. The older Fabian socialists like
Sidney and Beatrice Webb thought that firms captured
some unearned increment from labor, without adding
anything of value. They were comfortable with taxing
these economic “rents” as a recipe for social
equalization of incomes. But the success of American
capitalism rests on the high returns to innovation.
We want firms to be able to go from zero to sixty
miles an hour in three seconds. We want two guys in
a basement to end up with a tidy business called Hewlett-Packard.
As best I can tell, the current debate on the labor
side simply does not consider any of these issues.
Management Rights
QUESTION: It sounds as though the whole world of
labor management is changing. I used to negotiate
contracts for the employer side. I want to know how
things will be changed. For example, on the employer
side, if there were provisions in the contract that
we could not live with, or could not economically
deal with, we just wouldn’t sign the contract.
We would not agree. We always insisted on provisions
or on a management rights clause so that we always
had our rights in terms of management. The union could
not get into that area of things.
PROFESSOR EPSTEIN: Essentially, management rights
are a mandatory term of bargaining. Under the EFCA,
therefore, it is subject to arbitration under rules
to be determined later. That’s the current proposal.
It is really tough, because there is no guarantee
that those common clauses will become the templates,
and it is very easy to imagine an arbitrator saying
that the purpose of the EFCA is to rid us from the
shackles of employer domination under our current
retroactive or retrograde system. If so, the EFCA
becomes a mandate for us to start with new and creative
solutions, so all these clauses disappear. We really
do not know, and the outcome will all depend on as
yet unknown administrative rules, which inevitably
will be subject to enormous amounts of judicial deference
under the Chevron Doctrine.[28]
So in the EFCA, you are buying a pig in a very large
poke.
Obama Administration
QUESTION: As a Democrat, I hope that some of them
will come to their senses. But at this point, it’s
basically a feeding frenzy on this issue, and they
are very adamant. What’s the chance of your making
these arguments to Paul Volcker, Bob Rubin, and Larry
Summers?
PROFESSOR EPSTEIN: The chance of making these arguments
to those men is negligible because they are not likely
to be the ones to decide this question. The Obama
program, as best I can figure out, is organized into
task forces with respect to different areas. These
people are the ones to talk about in dealing with
the bond market, convertible debentures, or anything
having to do with inflation, bailouts, and so forth.
But labor issues are not going to be in their portfolio.
They are likely to be in the portfolio of people like
Hilda Solis, Obama’s designated secretary of
labor, who has a long record as a staunch union backer.
Other people will be drawn, I suppose, from the Obama
transition team on labor, which features a long list
of distinguished persons in the labor movement. Indeed,
that cast is so large that no one knows which of them
will have the dominant hand.
But owing to Obama’s strong level of union support,
I fear that his labor team will be to the left of
his general economic team. That Obama’s labor
associations have been largely unknown is a sign of
how skillful a campaigner he was during the recent
election, for he did not raise these labor issues,
sensing perhaps that they would not prove popular
with the public at large. Even some of the Democrats
who are solidly behind Obama on matters of taxation
or foreign affairs or energy are quite opposed to
him on this statute. My hope is that American businesses
will push very hard to stop this law. Indeed, the
Chamber of Commerce has become quite active on this
issue, but it is hard to get individual firms to speak
out against the act. Remember, the union gets to pick
whom it’s going to organize first, and it can
target its vocal opponents. Lone academics do not
have that particular vulnerability.
Corruption
QUESTION: Could you say a few words about corruption?
I grew up in a family that had many contacts in unions,
and around the dinner table it was common knowledge
that all the union people were corrupt, including
the top people in the Teamsters Union. And might it
be that the problems that you’re talking about
are actually solved by various payoffs and accommodations,
so in reality, it’s not as bad as you think?
PROFESSOR EPSTEIN: I think that it’s wishful
thinking to turn the EFCA into a referendum on corruption.
The coercion problem and the corruption problem were,
in fact, very serious problems when you and I grew
up in the 1950s. Landrum-Griffith,[29]
which was passed in 1959, but which I did not mention
in my talk, has made something of a dent on this issue.
In addition, unions understand that if they actually
steal from their members, they face a loss of popular
support.
So while corruption may be an endemic problem, it’s
also a low-level problem. I do not think that it’s
going to be particularly important. It is a serious
criminal offense for an employer to try to buy off
a union organizer with a bribe, saying, “Please
take a dive in the next election.” And note that
all elections are not eliminated by the EFCA. A union
could still ask for one in the organization phase,
although most people are hard-pressed to imagine any
circumstance in which it would choose to do so. But
it is instructive to note that secret-ballot elections
are preserved in two circumstances: decertification
and disputes between two unions. When the unions are
at risk, they will not allow the card check to be
used against them. In these settings, the opportunity
for corruption still remains. Nonetheless, I do not
think that many employers or union leaders are going
to want to run that risk, no matter what the setting.
I think that the following is the better model to
work with. It’s less inflammatory and more accurate
to assume—even if it is false—that every
union is a perfect fiduciary for every worker whom
it ceases to organize. Even on that assumption, the
EFCA is a complete disaster. I see no reason to go
off into very difficult empirical questions as to
the degree, distribution, and frequency of corruption.
It is far better to take the exact opposite approach
by insisting that it is unwise for the law to create
incentives for people to behave in counterproductive
ways. The EFCA will create a social surplus destruction
machine in which both employers and employees will
be left worse off in consequence of the legal regime
that it will introduce.
Here is what happens if corruption becomes the centerpiece
of the discussion. Your opponents will try to bait
you by asking whether you believe that unions are
really corrupt. If you say yes, they’ll give
you statistics as to why that claim is false. Now
you are in a factual swamp from which you cannot escape.
So take the other tack that says unions are honest
agents with the wrong incentives. You can then talk
about the conflict-of-interest problems because everyone
understands the unfairness in a two-tier wage situation,
even if they do not quite understand its particular
origins.
People also understand the sources of union decline.
They do not believe that it is simply a function of
management intransigence. No one believes that the
job banks program at GM was a management innovation.
It was well understood, before its eventual demise,
that it had to be introduced at the behest of unions
that needed to keep a broad base even if it meant
paying people in job banks programs full wages to
sit in a room and shoot paper clips into wastebaskets
with rubber bands when everyone knows that their jobs
are not coming back.
It does not take a genius to know that this arrangement
makes no sense. So as for the question of why this
contract comes to pass, the explanation is that a
union is always an inefficient monopolist in a way
that a corporation is not. The corporate monopolist
has shareholders, not workers. All it has to do is
maximize profits by changing prices and quantity to
maximize total revenue, and the distributional problem
will take care of itself, given its ownership structure.
Every shareholder gets a pro rata share of the gain.
But with labor, you cannot reach this result. If the
efficient solution says that you need only eighty
workers out of a hundred, it is hard to leave the
twenty who are fired out in the cold. They need to
share in the gains, which is what the job banks program
tried to do. But with time, the whole scheme had to
collapse as it did. So once people understand that
the internal structure of a union complicates its
fiduciary duty, they will see that the only way it
can level the playing field is to continue with inefficient
modes of production.
It is interesting to look at Freeman and Medoff in
light of this analysis. They praise the sort of equalization
of wages across plants and job categories that unionization
brings about, not realizing that it has negative allocative
consequences, by creating shortages in some job categories
and surpluses in others. And they do not talk about
two-tier wage structures because they are the tip-off
as to how unions can lead to weak institutional structures.
What you would really like is to create a union, give
it shares, and have the shareholders claim the residual
rents from efficient production. Then give those shares
to people you could fire at will. But the moment you
adopt that capitalist model, you have simply abandoned
the whole premise that unionization can work across
generations.
Constitutional Issues
QUESTION: If you were charged a year or two from
now after this indefensible proposal went through
as an act, and the thought was to find some form of
constitutional issue that this is a violation of,
could you find something?
PROFESSOR EPSTEIN: Yes, I could. The effectiveness
of such a constitutional challenge, of course, would
depend critically under whose framework the analysis
takes place. Much of what I have written is completely
unfashionable. My first position is that any conscious
government deviation from the competitive equilibrium
is a taking, for which compensation is required.
This position is not all that novel. It was clearly
articulated by Justice Harlan in Adair v. United
States[30] in 1908, and it
was defended very ably by Justice Pitney in Coppage
v. Kansas[31] in 1914. So
my position has powerful antecedents because these
labor regulations cannot fall within the account of
the police power as a type of health or safety regulation.
Rather, they were what was termed “labor”
statutes, which we would describe as legislation that
created state monopolies without just cause. One way
to read liberty under the Fourteenth Amendment is
as a form of protection against state monopoly.
That position, of course, was decisively rejected
in the aftermath of the New Deal constitutional revolution.
It is therefore not possible to mount under current
law any constitutional critique against the NLRA.
But the EFCA is a whole new ballgame because through
compulsory interest arbitration, it essentially denies
firms the exit right that they enjoyed under the earlier
regime. So the intellectual task now is to find some
way to stress that feature of the EFCA that is most
vulnerable to constitutional attack. The easier target,
without question, is the compulsory arbitration provision
that follows the successful card-check campaign.
Here is how I would phrase the argument. Under present
law, the constitutional cases that deal with the taking
of real estate rest on a hopelessly artificial but
fiercely defended distinction between restrictions
on how an owner can use his land—think of zoning
restrictions—and the efforts of the government
to occupy or order occupation of his
property. The payoff from this distinction runs as
follows: the courts supply a very low level of scrutiny
for land-use restrictions but impose a very high level
of scrutiny on forced occupations.
Take this distinction over to labor law, and here
is how the situation shakes out. The NLRA reads like
a land-use restriction. It does not force an employer
to take a union into the business. It just restricts
the options that the owner has in how he runs the
business, much like a zoning law restricts the kinds
of options one has for building. Under current Supreme
Court law, it would be impossible to challenge such
restrictions even for real property. But the EFCA
looks more like a private occupation of the firm,
given that the employer cannot resist occupation by
the union. Indeed, given the statute’s compulsory
arbitration provision, the employer is duty bound
to hire employees even at a net loss to the firm.
So consider this analogy: suppose I say that you
now must buy goods from me and that you must pay me
a hundred dollars. The goods are worth forty dollars
in the open market. Is this not a taking of sixty
dollars from you, even though it’s couched in
the language of an exchange? Think back to what we
said about management teams that would never yield
on their prerogatives. These contracts unambiguously
leave one side worse off, even if they do not (as
in the long run they may not) leave the other side
better off. The arbitrators are forcing workers on
the firm. This forcible imposition is an action that
calls for strict scrutiny, and given the feeble justifications
for this intrusion, under this analysis, the EFCA
should be struck down.
I think that this argument is correct, but that does
not mean it’s going to win, because we have already
witnessed similar types of coercion upheld under the
Railway Labor Act At this point, the argument becomes
more subtle because it is now necessary to distinguish
between the two situations. I think that this challenge
can be met by looking back to the 1926 justification
for the RLA. Any disruption in service for network
industries has drastic effects: the industries shut
down, and the world cannot move. It is this brute
fact that explains why common-carrier obligations
have long been imposed on these businesses[32]—their
ability to exclude puts them in too powerful a position,
given the dearth of real alternatives. The common-carrier
rationale that applies to railways does not apply
to hotels and other kinds of businesses. That said,
this argument would admittedly be tricky because the
underlying law is so poorly thought out—but it
is correct as a matter of principle.
The second line of attack on compulsory arbitration
follows more conventional lines that still resonate
today. The simple argument is that the insistence
of the vague procedures for the political selection
of arbitrators, without any opportunity for appeal
to a neutral party, counts as an open invitation to
bias in violation of the most elementary norms of
procedural due process. The employer in these cases
is forced to play a game that is stacked against it.
The union faces no such risk because it can always
avoid the arbitration route by resorting to the secret-ballot
election. This radical difference in position fails
to meet the standards of fair play. It could be portrayed
as a Salem witch trial, without any exit option. I
think that this argument is also correct.
The next question is: Who raises this argument, and
when? Under current Supreme Court law, the employer
would have to wait until the end of arbitration, when
the record is closed. Quite simply, in this area,
the Supreme Court has rejected all efforts for remedies
before the fact, which are routinely granted under
the First Amendment, with its fear of prior restraint.
But in this instance, any refusal to entertain a facial
challenge to the EFCA will cause real dislocation.
It cannot be the law that some arbitrations meet constitutional
standards while others do not. The chaos that would
result from case-by-case litigation is too much to
bear. The facial challenge here rests on features
of the EFCA’s procedures that are sure to have
an impact on all cases. The matter should be decided
before one faces hundreds, if not thousands, of settlements
and arbitrations under a wholly flawed procedure that
could take months before the first case reaches the
appellate courts. I would urge the court to look at
the facial challenges, which do not present any obstacles
to review. It would be dangerous for a court to use
any principles of ripeness to forestall a facial challenge
in these cases.
Ideally, it would be appropriate for some court to
issue a temporary injunction against the implementation
of the EFCA until, first, its regulations are issued,
and second, until one test case has passed on its
constitutionality. My hope is that the gravity of
the situation under the act will spark a serious consideration
of these constitutional challenges on their merits.
Intellectually, this case is compelling. How the courts
will decide it is very much an open question. But
the only chance of success depends on a bold and unflinching
condemnation of a statute that I hope never sees the
light of day.
APPENDIX THE EMPLOYEE FREE CHOICE
ACT OF 2009[33]
IN THE SENATE OF THE UNITED STATES
March 10, 2009
AN ACT
To amend the National Labor Relations Act to establish an efficient system to enable employees to form, join, or assist labor organizations, to provide for mandatory
injunctions for unfair labor practices during organizing efforts, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘Employee Free Choice Act of 2009.’
SEC. 2. STREAMLINING UNION CERTIFICATION.
(a) In General—Section 9(c) of the National Labor Relations Act (29 U.S.C. 159(c)) is amended by adding at the end the following:
(6) Notwithstanding any other provision of this section, whenever a petition shall have been filed by an employee or group of employees or any individual or labor organization acting in their behalf alleging that a majority of employees in a unit appropriate for the purposes of collective bargaining wish to be represented by an individual or labor organization for such purposes, the Board shall investigate the petition. If the Board finds that a majority of the employees in a unit appropriate for bargaining has signed valid authorizations designating the individual or labor organization specified in the petition as their bargaining representative and that no other individual or labor organization is currently certified or recognized as the exclusive representative of any of the employees in the unit, the Board shall not direct an election but shall certify the individual or labor organization as the representative described in subsection (a).
(7) The Board shall develop guidelines and procedures for the designation by employees of a bargaining representative in the manner described in paragraph (6). Such guidelines and procedures shall include—
(A) model collective bargaining authorization language that may be used for purposes of making the designations described in paragraph (6); and
(B) procedures to be used by the Board to establish the validity of signed authorizations designating bargaining representatives.
SEC. 3. FACILITATING INITIAL COLLECTIVE BARGAINING AGREEMENTS.
Section 8 of the National Labor Relations Act (29 U.S.C. 158) is amended by adding at the end the following:
(h) Whenever collective bargaining is for the purpose of establishing an initial agreement following certification or recognition, the provisions of subsection (d) shall be modified as follows:
(1) Not later than 10 days after receiving a written request for collective bargaining from an individual or labor organization that has been newly organized or certified as a representative as defined in section 9(a), or within such further period as the parties agree upon, the parties shall meet and commence to bargain collectively and shall make every reasonable effort to conclude and sign a collective bargaining agreement.
(2) If after the expiration of the 90-day period beginning on the date on which bargaining is commenced, or such additional period as the parties may agree upon, the parties have failed to reach an agreement, either party may notify the Federal Mediation and Conciliation Service of the existence of a dispute and request mediation. Whenever such a request is received, it shall be the duty of the Service promptly to put itself in communication with the parties and to use its best efforts, by mediation and conciliation, to bring them to agreement.
(3) If after the expiration of the 30-day period beginning on the date on which the request for mediation is made under paragraph (2), or such additional period as the parties may agree upon, the Service is not able to bring the parties to agreement by conciliation, the Service shall refer the dispute to an arbitration board established in accordance with such regulations as may be prescribed by the Service. The arbitration panel shall render a decision settling the dispute and such decision shall be binding upon the parties for a period of 2 years, unless amended during such period by written consent of the parties.
SEC. 4. STRENGTHENING ENFORCEMENT.
(a) Injunctions Against Unfair Labor Practices During Organizing Drives—
(1) IN GENERAL—Section 10(l) of the National Labor Relations Act (29 U.S.C. 160(l)) is amended—
(1) Whenever it is charged—
(A) that any employer—
(i) discharged or otherwise discriminated against an employee in violation of subsection (a)(3) of section 8;
(ii) threatened to discharge or to otherwise discriminate against an employee in violation of subsection (a)(1) of section 8; or
(iii) engaged in any other unfair labor practice within the meaning of subsection (a)(1) that significantly interferes with, restrains, or coerces employees in the exercise of the rights guaranteed in section 7;
while employees of that employer were seeking representation by a labor organization or during the period after a labor organization was recognized as a representative defined in section 9(a) until the first collective bargaining contract is entered into between the employer and the representative; or
(B) that any person has engaged in an unfair labor practice within the meaning of subparagraph (A), (B) or (C) of section 8(b)(4), section 8(e), or section 8(b)(7);
the preliminary investigation of such charge shall be made forthwith and given priority over all other cases except cases of like character in the office where it is filed or to which it is referred.
(b) Remedies for Violations—
(1) BACKPAY—Section 10(c) of the National
Labor Relations Act (29 U.S.C. 160(c)) is amended
by striking ‘And provided further,’ and inserting
‘Provided further, That if the Board finds
that an employer has discriminated against an employee
in violation of subsection (a)(3) of section 8 while
employees of the employer were seeking representation
by a labor organization, or during the period after
a labor organization was recognized as a representative
defined in subsection (a) of section 9 until the first
collective bargaining contract was entered into between
the employer and the representative, the Board in
such order shall award the employee back pay and,
in addition, 2 times that amount as liquidated damages:
Provided further.’
(2) CIVIL PENALTIES—Section 12 of the National Labor Relations Act (29 U.S.C. 162) is amended—
(A) by striking ‘Any’ and inserting ‘(a) Any’; and
(B) by adding at the end the following:
(b) Any employer who willfully or repeatedly commits any unfair labor practice within the meaning of subsections (a)(1) or (a)(3) of section 8 while employees of the employer are seeking representation by a labor organization or during the period after a labor organization has been recognized as a representative defined in subsection (a) of section 9 until the first collective bargaining contract is entered into between the employer and the representative shall, in addition to any make-whole remedy ordered, be subject to a civil penalty of not to exceed $20,000 for each violation. In determining the amount of any penalty under this section, the Board shall consider the gravity of the unfair labor practice and the impact of the unfair labor practice on the charging party, on other persons seeking to exercise rights guaranteed by this Act, or on the public interest.
ENDNOTES
1. Also called the Wagner Act, the NLRA, 49 Stat. 449 (1935), is codified at 29 U.S.C. §§ 151–69.
2. Officially known as the Labor-Management Relations Act, Taft-Hartley, 61 Stat. 136 (1947), is codified at 29 U.S.C. §§ 141–97.
3. 78 Stat. 241 (1964).
4. See, for my critique, Richard A. Epstein, Forbidden
Grounds: The Case Against Employment Discrimination
Laws (Cambridge, Mass.: Harvard University Press,
1992).
5. 26 Stat. 209 (1890), codified 15 U.S.C. §§ 1–7.
6. 38 Stat. 730 (1914), codified 15 U.S.C. §§ 12–27.
7. See John F. Kennedy, “Remarks in Heber Springs, Arkansas, at the Dedication of Greers Ferry Dam” (October 3, 1963), available at http://www.presidency.ucsb.edu/ws/index.php?pid=9455.
8. 208 U.S. 274 (1908).
9. Lawlor v. Loewe, 235 U.S. 522 (1915).
10. The comment was made by the editor of the United
Mine Workers Journal, as quoted in Joel I. Seidman,
The Yellow Dog Contract (Baltimore: Johns Hopkins
University Press, 1932), 11.
11. 38 Stat. 730 § 6 (1914), codified 15 U.S.C. § 17.
12. 254 U.S. 443 (1921).
13. 47 Stat. 70 (1932), codified 29 U.S.C. §§ 101–15.
14. 49 Stat. 449 (1935).
15. The peculiar difficulties faced by bilateral monopolies
have long been understood. See, e.g., Alfred Marshall,
Principles of Economics (1890; Amherst, N.Y.:
Prometheus, 1997), 309 (“If two absolute monopolies
are complementary, so that neither can turn its products
to any good account, without the other’s aid, there
is no means of determining where the price of the
ultimate product will be fixed”).
16. These figures reflect private-sector unionization
only. See Steven Greenhouse, “Sharp Decline in Union
Membership in ’06,” New York Times, January
26, 2007 (citing Bureau of Labor Statistics).
17. It should be noted that the distinction between “domestic” and “foreign” companies exists even though the foreign companies typically have American plants. Most of the foreign companies, including those in the automobile industry, realize that they are politically at risk if they do not have American plants that hire American workers. To meet this threat, they open up plants in the United States, which they are able to keep union-free by pointing out to their own workers the economic vulnerability of their unionized rivals.
18. See, e.g., Jonathan Cohn, “Assembly Line,” The
New Republic, November 21, 2008.
19. See David Kiley, “UAW’s Gettelfinger More Pragmatic
than He Appears,” Business Week, July 23, 2007.
20. According to the Bureau of Labor Statistics, domestic automobile industry employment fell from 1,286,100 in December 2000 to 781,500 in December 2008. See http://www.bls.gov/bls/auto.htm.
21. See David E. Sanger et al., “Bush Aids Detroit,
but Hard Choices Wait for Obama,” New York Times,
December 19, 2008.
22. “Strengthening America’s Middle Class Through the Employee Free Choice Act,” hearing on S. 1041 before the Senate Comm. on Health, Education, Labor and Pensions, n. 8 (2007) (statement of Cynthia Estlund, Catherine A. Rein Professor of Law, New York University School of Law), available at
http://help.senate.gov/Hearings/2007_03_27_a/Estlund.pdf.
23. The number of union elections held, and workers organized, has been declining. In 2007, unions won 60.1 percent of union elections and organized 57,908 workers, according to the National Labor Relations Board.
24. See supra, n. 18.
25. 44 Stat. 577 (1926), as amended, codified 45 U.S.C. §§ 151–88.
26. See Richard B. Freeman and James L. Medoff, What
Do Unions Do? (New York: Basic Books, 1984).
27. See Anne Layne-Farrar, “An Empirical Assessment of the Employee Free Choice Act: The Economic Implications” (March 3, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1353305.
28. Chevron, Inc. v. National Resources Defense
Council, 467 U.S. 837 (1984).
29. See the Labor-Management Reporting and Disclosure Act of 1959, 73 Stat. 519 (1959), codified as amended, 29 U.S.C. §§ 401–531.
30. 208 U.S. 161 (1908).
31. 236 U.S. 1 (1914).
32. The first purpose articulated in the RLA was: “To avoid any interruption to commerce or to the operation of any carrier engaged therein,” Railway Labor Act, ch. 347, § 2, 44 Stat. 577 (1926).
33. Certain language, reflecting solely conforming amendments, has been omitted.
