Sectoral Bargaining’s Promise and Peril

Dear David,

I’m delighted for the opportunity to discuss labor reform with you. As you note, while we approach the discussion from different perspectives, we agree generally on the economic struggle of the American worker and the need for a policy framework that goes beyond the fundamentalism of trusting that free markets will necessarily generate good outcomes. We also agree that a well-functioning system of organized labor that gives workers a seat at the table should be part of that framework, and share a frustration with the American left-of-center for focusing on driving more workers into a dysfunctional system and with the right-of-center for celebrating the system’s demise. The question, of course, is how would an effective system look?

I’ve learned a lot since publishing The Once and Future Worker two years ago, but by far the area in which my thinking has changed most is on the question of “sectoral bargaining” as a model for organized labor (in no small part thanks to conversations with you). What struck me then as an obviously undesirable framework now seems the most promising, and one that should hold particular appeal for conservatives.

In Worker, I argued for new forms of worksite representation and bargaining but specified that “multiemployer bargaining should be banned.” My thinking was influenced particularly by the experience of the domestic auto industry, whose “pattern bargaining” between the United Auto Workers and the big-three carmakers yielded comparable contracts industrywide:

Collectively bargained terms that applied to all industry producers would maintain the competitive balance among them; if costs rose, they would raise prices together, preserving profit margins.

This translated into higher prices, lower output, and slower innovation for the economy as a whole—and weaker job growth, harming prospective employees. Union members were also consumers, of course, which meant that they were often negotiating against themselves—balancing their desire for higher wages and benefits against their desire for lower prices. If nonunion consumers were the deal’s real losers, well, then, that was all the more reason to join a union.

In recent decades, the collectively bargained concessions that unionized firms have adopted often put them at a disadvantage against foreign competition as well as against new, nonunionized domestic rivals. Unionized firms, as a consequence, have sought to shift their capital toward plants, regions, and countries where they can operate free of union constraints.

As a description of what happened in some domestic industries, I still think this is correct. The once-world-leading American auto industry was badly, perhaps mortally, wounded. But that may not require a categorical rejection of sectoral bargaining. Some facets of such a system could be features rather than bugs, especially if operating within a more coherent framework. On the other hand, some seem like serious bugs, and it is on those points that I am particularly interested in your thoughts.

Why Sectoral Bargaining?

To begin with, I think the appealing features are:

1. Maintain the Competitive Balance. Negotiations that encompass all competitors have the potential to take areas of potential differentiation off the table and thus channel competitive energies in other directions. If labor relations are standardized, no one can seek to outperform everyone else by squeezing workers harder, potentially triggering a “race to the bottom.” Conversely, investing in productivity gains, innovation, customer retention, and so forth becomes that much more important. Broadly speaking, that seems like an attractive description of how we want our markets to operate and what outcomes we want them to generate.
2. “Negotiating Against Themselves.” When the relevant bargaining group is broad enough, workers reaching “too good” a deal is likely to have negative macro-economic effects—for instance, driving wages up ahead of productivity will land back on the same workers as inflation. A union negotiating with an individual firm may try to “get whatever they can” and hope to “free ride” on more reasonable agreements struck elsewhere, but in sectoral bargaining all sides have incentives to be reasonable in negotiations that affect the entire labor market’s behavior.
3. Regulatory Flexibility. In the American system, federal regulation must address every issue in anticipation of most workers having no representation, and then where a union is present the bargaining must go above and beyond the regulatory default. By contrast, in many sectoral bargaining systems, umbrella agreements struck at the national or sectoral level are the starting point, not the final word. In parallel, and especially with the most contentious issues already addresses, workers and management at the enterprise level are able to work more collaboratively on workplace issues and also agree to depart from the baseline where they might prefer some other arrangement. More issues can be bargained rather than regulated, and greater self-government is possible within the workplace.

As these potential benefits of sectoral bargaining suggest, part of the problem with examples of American “pattern bargaining” may have been that the system only went halfway. For one thing, three automakers may not be a sufficiently broad sector. For another, federal employment regulation was granting workers ever more protections, leaving the private bargainers to focus on productivity-dampening work rules, seniority systems, and so on. Broader coverage, and freedom to depart from baseline regulations, seem at least partial solutions.

4. Labor-Market Flexibility. While sectoral bargaining can seem particularly constraining on the economy given the breadth of its coverage, I find appealing the greater flexibility it yields within the labor market. For instance, independent contractors and “gig workers” are easily covered by sectoral agreements whereas our 1930s-style “vote at the worksite” mode of unionization is plainly inapposite. Likewise, structural obstacles posed by franchises, joint employers, fissured workplaces, and so on become resolvable—workers can be covered regardless of who signs their paycheck. Employers are covered based on the activities they engage in, not how they’ve structured their ownership and whether they’ve beaten back an organizing campaign recently.

Why Not Sectoral Bargaining?

All that said, I still see at least two major, perhaps dispositive obstacles:

1. Competitive Disadvantage. Part of the downfall of American unions in the manufacturing sector has been competition from differently-organized foreign firms and then non-union domestic ones. While the story of sectoral bargaining taking a low-wage model off the table is appealing in theory, in practice it seems likely that there will usually still be competition from sources not covered by an agreement, and we may be setting covered firms up for failure on a broader scale than before. How does the system avoid that? And if it can’t, and we’re still left with competition in a partially-organized market, haven’t we just brought back many of the old system’s infirmities?
2. Sclerosis. Even where we do bring everyone under the agreement—something easier to accomplish in service industries provided locally—we still have a question of whether the sides would behave in ways conducive to a healthy labor market. Is there any reason for confidence that minimum wages, for instance, will be set at levels conducive to growth rather than levels that simply benefit interests already entrenched? How do we avoid ending up with the sorts of productivity-reducing, innovation-slowing, price-increasing, output-constricting agreements we have gotten in the past, complete with “rubber rooms” for employees paid not to work?

European countries seem to have largely avoided these pitfalls, though both labor and management will eagerly list everything far from perfect about their systems. But it’s not clear to me how they’ve managed a greater focus on productivity, international competitiveness, and so forth. I’m always wary of resignedly chalking things up to “culture,” but when it comes to questions like modes of industrial organization and the understood obligations of businesses and workers, I do wonder what role unquestioned norms and expectations (with social sanction for departure) play alongside legal structures.

Perhaps in cases like the American auto industry, assumptions established at a time when competition was not a concern produced institutional inertia that precluded adaptation. By contrast, in places like Germany and Japan, perhaps the need to compete globally with lean and flexible operations was built into industry DNA from the start. This seems wishy-washy, but it could also be true. We’d still need to believe we’ve learned our lesson. Is there any evidence that if we restructure, more constructive bargains would be reached this time around? Or should we really be focusing on domestic services industries anyway, and we can expect the dynamics there to be somehow different? Give me some confidence we can be successful here.

Fair warning—I still have other questions too! How do we figure out who bargains with whom? How do we ensure agreements happen? Who pays for it? What political compromises are necessary and plausible—for one thing, are existing labor organizations even in favor? But I thought we should start with why we should even want to make it work.

Yours in managerial prerogatives,

Oren Cass