Unions and How They Affect HR Management (University paper)
My aim in this paper is to analyze the role that unions and their government-backed coercion play on an HR manager. Do they make the job easier or harder? In order to answer this question we must first form our opinions about these issues in the prism of cause and effect.
As a student that leans strongly toward classical liberal ideas, especially those as theorized by the Austrian School economists, I have spent the last three years reading about the effects that these restrictions have on businesses and the economy in general. I believe I can use those lessons in a more detailed, job-related level and see how they influence the sphere of HR.
In social democracies like Austria, Germany, or France as well as many other European countries, there is a very strong, consolidated belief that unions, minimum wages and regulations (particularly regarding labor) are crucial to avoid the unfair treatment of employees and give them the bargaining power they “lack.” It is essential, it is held, that the government oversees the market and restricts it in such a manner that it doesn’t produce undesirable results. It is like the image of a circus caretaker taming a lion. If the lion is under control, he will delight the spectators with his show, but if unleashed, he will cause great havoc and even kill.
Unions are believed to be important because in the spirit of collectivism they assure that employees are paid the wages they “deserve” and that the conditions under which they work are “fair.” Minimum wages are believed to be important because they decrease the almost “absolute advantage” that the employer has over the employee and thus diminish the possibility of “exploitation.” Regulations are believed to be important because they contain the “excesses” of the free market and create a social safety net. But the question arises: do they, really? Are these cultural beliefs correct, or do they fall apart under the close observation of science? There are economists who suggest that there is both an ethical and economic justification behind these movements. I happen to be in the group of believers that there isn’t, and here is why.
“No one has ever succeeded in the effort to demonstrate that unionism could improve the conditions and raise the standard of living of all those eager to earn wages.” That’s what the great Austrian economist Ludwig von Mises once wrote in his magnum opus Human Action (pp. 764-65; pp. 770-71). The Austrian School position on the myth of exploitation is based on the understanding of the concept of marginal product of labor (DiLorenzo, 2004). Marginal product of labor can be defined as the extra revenue that employers earn as a result of employing an additional (marginal) unit of labor. The competition between firms, say Austrian School economists, makes sure that the employees are paid their marginal product. If, for example, one’s marginal product of labor is $200 but is being paid only $100 (being exploited), then other firms will earn profit by employing this individual from $101 up to $199. It is, therefore, the free market competition between firms looking to take advantage of the difference between the prevailing wage rates and the overall marginal product of labor that ensures that workers will be paid their almost full product. In a free market, therefore, businesses will only risk losing employees if they compensate them for much less than they bring in revenue. This is further confirmed by daily, empirical evidence, for we have yet to see the theory of exploitation work in practice in free economies where the government has not radically interfered with the market through labor laws. Some leftists claim that this is as a result of minimum wage laws, but this is evidently not true, for the wage rates in industrial world are much higher than the average minimum wage.
Of all the critiques that some economists direct towards unionism, the most important one is the claim that the end result of all unions is unemployment (Mises, 1952; Friedman, 1979). The thinking behind this idea is that unions are successful at raising wages, but in the process their coercive actions will force the company to lay off some other workers. This holds true especially for small companies whose profit margins are very small. Any increase in wages will have to be accommodated with a decrease in other units of labor (i.e. employees). Simple arithmetic proves this, so let’s look at a hypothetical example. A firm that can only pay $100 dollars in wages per week, and has employed 10 workers, has done so in agreement that each of them earns $10. Now, if let’s say 4 of those 10 employees are unionists and succeed to increase their wages up to $15 each through coercive actions (such as strikes and government backing), the remaining revenue for the business to pay will be only $40 ($100 less $15 x 4). As we can see, $40 can only cover for another 4 workers, meaning that two have to be fired. So in unionizing, these workers have successfully increased their wages, but have done so only at the expense of others within the firm.
Now what is the role of HR manager in this? Taking into consideration that firing employees is one of the worst things that an HR manager can do, and definitely one of the things that they want to avoid, this proves to be a very tricky situation. Unions, therefore, are a great threat for the HR manager and an obstacle in completion of the job. In the light of this situation, the HR manager can only give in to the pressure of the government-backed unionists and then try to limit the damage done as much as possible.
Another problem with unions is that the higher costs that they impose on the firm are usually borne by efficient workers. Since unionists are dissatisfied with their wages, it’s logical to think that’s because they’re not as efficient in their work. But because they are unionized, their wage increases will have to come at the expense of those who aren’t. Then again we come back to the efficient workers, which as we see are penalized for not being part of unions. Of course, lower productivity means lower quality products and services, and as a result, a lower standard of living (F.A. Hayek, 1960).
One of the duties of the HR manager is to hire hard-working, efficient employees and then use training to increase the overall skills. Taking into consideration that the best workers are penalized for the benefit of less efficient ones, the HR manager may well face a crisis of morale and motivation. The outcome of all this may be that the efficient workers will cease to be so, and the overall productivity of the company may fall.
Another critique against unions is related to experience: whenever unions increase wage rates, businesses look to accommodate these higher costs through higher prices. Consumers are the ones who pay for the coercive increases in costs which ultimately lead to higher prices. Taking into account that all the unionists are workers and therefore consumers at the end of the day, this means that unionists themselves will not necessarily end up being richer in real terms.
While price increases are not a matter of the HR manager, but rather other executives such as the Marketing manager, the awkwardness that the HR department suffers is still present. The reason for this is that price increases have not come for economic reasons in pursuit of optimal maximization of profit, but rather as social costs that the statist system brings. Since the HR manager is the one responsible in dealing with these illicit and compulsory demands, he/she will be held most responsible for these price increases which may have consequences for the firm later.
The wage increases are risky especially in small companies where the profit margins are really small and the company fights to survive on a daily basis. Union practices against these small companies can inevitably lead them to bankruptcy. Obviously, the end result of bankruptcies is debt, less competition, lower quality of goods and services, and again, a lower standard of living.
While other executives will be sympathetic to the HR manager in this case, because his/her hands are tied, it’s no exaggeration to say that “poor HR management” will be written in the history books as a reason of bankruptcy.
In addition to all the economic distress that they cause, unions also commit highly unethical practices when they interfere with private property rights and even resort to violence (there’s a book written specifically for this called Union Violence: The Record and the Response by Courts, Legislatures, and the NLRB by Armand J. Thieblot, Jr. and Thomas R. Haggard). This means that unions impose cost on firms even outside their pay structure; bad advertisement, vandalism or even threat of life. They distort and destroy the public relations that HR managers try so hard to build.
In the end, unions only produce collective wishes that are summed up generally. The specific, subjective wishes of the individuals are swept aside, most possibly in favor of union leaders who get to negotiate individually for special benefits. How are the HR managers to negotiate with adults who are controlled by others? These awkward situations create legal problems when lawsuits are later filed for clauses that workers didn’t agree to individually but were granted as a collective package required by the union. The firm is left to fight court battles with both the individuals who failed to coordinate with their union interests and the unions themselves that misrepresented the individuals in the first place. Nobody can know better than you what you want, so only individuals can agree with HR managers on their job contracts as clearly and as consensually as possible.
After analyzing the negative effects that unions have in the overall economy and their dismal failure to increase the standard of living, I have also come to understand that they make the HR manager’s job much more difficult. However, the key characteristic of entrepreneurship, which is a product of the beautiful free market, is that of finding solutions even within claustrophobic surroundings imposed by other aggressive agents. While I don’t entirely regard the entrepreneur as the hero of unsailed waters as Joseph Schumpeter did, I still think he has the capacity to overcome many difficulties that are put in his way unfairly. It is his success in doing so that has paved the way for the modern division of labor, the fruits of which have been increased capital and therefore wealth. But it is my concern, however, that the entrepreneur and his success story may not last long if we are burden him with such dire restrictions and controls.
Mises, Ludwig. Human Action (1949). Yale University Press.