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June 10, 2007

Labor unions and private equity firms

Very interesting...

The Steelworkers union has an investment banker working down the hall from its president. A Service Employees International Union organizer is becoming an expert on leveraged buyouts. The Machinists are loading up their research department with MBAs.

The embattled labor movement is learning to think like capitalists, but not by choice. As burgeoning private equity funds bought U.S. companies last year worth more than half a trillion dollars -- a tenfold increase in only three years -- unions are shoring up their diminished bargaining power to try to negotiate worker-friendly financial deals with these new masters of the universe. [WaPo]

It's great that unions are training their own financial wizards to broker more sophisticated deals on behalf of their membership.

Strategies are evolving as fast as the deals. The strongest unions have traded concessions for a share of eventual profits and for limits on how much money investors can take out of a business. Others have formed alliances with investors who honored labor commitments, becoming finders for potentially lucrative deals elsewhere. [...]

Other unions have adopted tactics as diverse as the industries they work in. The United Food and Commercial Workers union now routinely negotiates language requiring new grocery store owners to restore any initial wage concessions over the life of a contract. If investors cash out early, a poison-pill clause requires the new owners to make workers whole. The effect, according to UFCW research director Howie Forman, is to give the union leverage to force prospective buyers to the bargaining table. [WaPo]

The article paints a pretty rosy picture. Intuitively, it seems like a good idea for unions to get involved in these high-level deals. The most important concessions for workers may be won in the board room, rather than on the picket line. Unions have already become sophisticated political actors, why not extend their reach in the financial sphere?

I'm sure there are many potential pitfalls and lots of devils in the details.

So, is the rapprochement between big labor and private equity good for the labor movement? Have at it, hivemind.

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No, it's not good. Inherently, adversarial systems require actual adversaries. Just look at our current media situation to see what happens when these groups start viewing each-other as allies, rather than adversaries. They get too cozy, and screw the people they are supposed to serve.

private equity firms cover a lot of ground and do a lot of different kinds of business; different firms have very different objectives, and depending on the industry and the fund, they can look very much like public ownership, or very much like Gordon Gekko. But I think it's safe to say that the greater the more private the ownership structure, and the more turnover in control, the worse for labor. So, overall, my experience has been that private equity can be very bad for labor. Getting sophisticated about it, and getting a seat at the table early, are all very good, and I'd think all else being equal a union that is well advised and on top of things would be hurt significantly less than a union that wasn't. But I wouldn't look at this as a situation that has the potential to be a boon to the labor movement in the long run--it's something that, if done right, won't hurt as much as it otherwise could.

that said, there have been a few examples where private equity has taken over from terrible management and simply turned around a failing company, and that's obviously great for workers at those companies. Low-lying fruit is getting awfully scarce, though.

I'm glad to see the labor movement at the table and being active on the front end. Unions do a great job of bargaining on behalf of workers.

Unions still exist? I'm glad, don't get me wrong, I just don't see 'em 'round here no more.

So, is the rapprochement between big labor and private equity good for the labor movement?

Sometimes.

There are three basic ways that private equity and organized labor can work together--one good, one questionable, and one bad.

Good: organized labor representing employees to ensure that management uses employee skills/knowledge well and pays for it fairly.

Questionable: organized labor using the need for employees to extract concessions that are harmful in the long term. (For example, to protect job roles that are no longer needed due to technological change. This kind of concession is likely to weaken union firms relative to non-union firms.)


Bad: management using organized labor to do price-fixing that would be illegal for them to do directly; this used to be a Teamster specialty in the Hoffa era. (Undercut the agreed-upon pricing structure, and suddenly your deliveries would become unpredictable, late, damaged, etc.)

What I don't know is how much of the current working together is in which category.

Union pension plans are major investors, and this leverage has been used spottily.

The major trend has seen unions favoring their existing and retired members, and feathreing the nest of union management, at the expense of future workers and the overall strength of the union.

There are rare cases of unions joining management boards or extracting benefits from corporations undergoing restructuring that have brought real benefits to their memberships. Often, they have been out-negotiated or left with a weakened hand.

Any efforts to be able to negotiate as equals should be supported.

Labor comes first and is independent of capitol. Capitol is the fruit of labor.

So if capital is the fruit of labor--doesn't that mean it deserves the same protections as labor?

You guys are kidding right? I mean, labor unions are "good" ? That must some kind of new economics science you are citing. Labor unions have tried for over 80 years now to re-invent economics to show that the interests of capitalists don't align with neither the interests of the society, nor the interest of the workers themselves. And this is definitely not true. I could at lengths about the specific economic arguments (I am myself a Labor Economist) against unions but I do not think we need to dig that deep. Just look at the membership rates for unions. From the high of 30% of the labor force in the 50s they have went down to the low teens. For 80 years the workers themselves have been distancing away from unions because they have realized that labor unions, strangely enough, do not serve the interests of the workers. The real support labor unions find in intellectuals and other politically active groups, not with the workers themselves. The fact that unions need to resort to dictatorship like methods of "card-check" voting in order to slow just a little the dwindling of their membership is the biggest proof in my eyes of the fact that they do not serve any good purpose, even to the workers themselves.


Now the unions have attacked the private equity firms. Why do they even want to negotiate anything with them? Private equity does not deal with the direct management of companies, contrary to peoples' opinion. They just buy them, reorganize, put in a new management and let the company run on its own. Even if we accept the wrong assumption that labor unions have some positives, they are justified to bargain only with their direct corporate management, not with the investors themselves. The fact that they want to bargain at both levels is just an example of the unfair advantage they want to gain. Ironically, if they ever are able to gain any sort of an "advantage" (historically, labor unions have been pathetically unsuccessful in delivering the higher wages they promise), it will only work against the workers themselves.

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