How do/would unions differ in service industries?

by on March 19, 2007 at 7:19 am in Economics | Permalink

Most unions are found in manufacturing, but the new pro-union arguments emphasize the creation of unions in service industries.  I can think of a few differences between manufacturing and services:

1. Labor costs are more important in service industries, so unions have less scope to raise wages.  This is Megan McArdle’s argument.

2. There is more long-term fixed capital in manufacturing, and that gives unions greater scope to confiscate those quasi-rents.  This is related to #1.  (In a service industry, would the transfer be taken away from the return to brand name capital?)

3. On average there is more market power in manufacturing, which again gives unions greater room to raise wages in those sectors.  In a perfectly competitive industries, extra wage demands will bankrupt the firm. 

4. Many service sector firms face less foreign competition, but I believe they nonetheless face more competition overall.  Lower fixed costs mean a more competitive industry, which brings us back to #3.

5. Jobs have shorter duration in service industries, which tightens the link between wages and the current state of the labor market.  That also means a smaller role for unions.

6. We have a mental model of service sector companies such as Wal-Mart, which try to get by on the cheap in labor markets.  It is harder to make the same claim about General Motors.

The bottom line: Except for #6, most of the effects imply that unions will be less effective in the service sector.  You’ll all think of some mechanisms I didn’t, but my tentative conclusion is that unions bring both lower costs and lower benefits in service industries.

I might add I once belonged to a service sector union, in a supermarket as a teen.  It was not a pretty picture.  I paid high dues and received no apparent benefit, relative to the workers in non-unionized supermarkets.  I even heard rumors of corruption.

bluto March 19, 2007 at 8:31 am

I think there is also the important item that it’s much easier to pay for individual performance in most of the service sectors that have very much market power. Waitstaff, banking, and sales all would probably see substantial declines in productivty if everyone recieved a union wage.

Robert Speirs March 19, 2007 at 9:44 am

What’s the basis for saying Wal-Mart tries to get by “on the cheap” in terms of wages? I’ve heard that their wages are higher than similar firms like K-Mart. That’s why they always have multiple applicants for every opening. How many of their applicants are already working? Would they be applying if Wal-Mart paid less?

spencer March 19, 2007 at 9:55 am

Doesn’t number 2 about more capital in manufacturing mean that service sectors
have less capital per worker that leads to less productivity, lower wages and
finally, smaller barriers to entry for potential competitors. So number 2 may be more important then you suggest rather then number 3.

Archer Martin March 19, 2007 at 2:59 pm

The argument about Wal-Mart’s low wages (not a union argument per se, a more general issue), is that their pay is so low that even full time workers make use of social services originally intended for welfare recipients (as in, they don’t have health insurance, must use emergency Medicaid if need hospitalization). So we are all subsidizing Wal-Mart via our taxes. I for one object to that, the same way I object to other forms of pork. This one is hidden, so not debated much.

I lived in Australia, which has a very high minimum wage (over A$11 an hour, probably now over A$12, which in local purchasing power terms is pretty comparable to $11-13 here). Australians love to complain about their lousy service, but frankly, it was on average markedly better than what you see here (New York), particularly in retail stores. Better, more responsible people are willing to take those jobs. And happy to have the work, and likely not as much turnover. Oh, and because wage is so high, they do tip less. 10% is a generous tip down under

Person March 19, 2007 at 5:17 pm

rjh, you are in error about this: “The original push for the portable pension (first IRA, then 401(k)) came from a combination of the professional societies and some related unions. ”

If you’re referring to Walter Reuther’s (or someone related) idea to combine all employers in some region
into a centralized pension fund, this is not an example of an IRA or 401(k)-type “portable
pension”. What the unions wanted was a *defined benefit* plan. IRA’s and 401(k)s are defined
*contribution*. While Reuther et. al were smart enough to want portability, they simply wanted portability
of the defined benefits — i.e., you transfer the “pension credits” to your next employer, *not* account
securities, as would be the case in a 401k.

It was precisely this failure to set up real investment accounts and instead use Ponzi schemes that killed
their industries decades later.

Also, I don’t think plumbers, electricians, doctors, and engineers count as “service workers” but the
definition is a bit hazy to begin with.

rh March 20, 2007 at 1:38 pm

I did not mean “like IRA” I mean precisely the IRA effort. It was professional societies like the IEEE, ACM, and others together with some of the engineering unions that made this push. The old company unions were not interested. They had their union funds to pillage (Teamsters) or company pensions already well established.

It was the representatives of the employees of the new companies that recognized that the lack of portable pensions was a major problem to their members. They used the spectre of the traditional union pension as part of the story used to persuade the new companies to join them in pushing for the IRA.

The 401(k) built upon the success of the IRA.

Paul April 11, 2007 at 6:03 am

It all depends where you start from.
Go and look in some other countries.

For ex. in the Netherlands, my home country, there exists a Social Economical Council (Sociaal Ekonomische Raad, SER) that is a tripartite advisory-board of the government (employees (read union-organizations), employer-organizations and government.
“It represents the interests of trade unions and industry, advising the government (upon request or at its own initiative) on all major social and economic issues.”

For an in-depth explanation of structure and working see http://www.ser.nl/overdeser/default.asp?desc=en_index. (In English).

You limit the union’s scope to negociations about wages. There are more issues, like hours-to-work, juridical assistance, child-care-while-working, health-care and macro-economic influence.

Wal-Mart is not a service-industry. Its business is to deliver goods, not services.

I might add that normally the union fees are related to the income of the worker. It is based on solidarity-funding not private insurance.
Rumors don’t belong in a serious article. Corruption is everywhere where there is a lack of control.

Comments on this entry are closed.

Previous post:

Next post: