Reckless Unions

Richard Epstein

Public employee pension reform is a hot topic these days. This past week Rhode Island settled its dispute with the unions over its sweeping pension reform statute of 2011. Detroit and San Jose are wrangling over their own deals with their respective unions. Other cities and counties will follow. None of these jurisdictions can ignore the huge holes in their pension programs for both retired and active employees. One estimate puts the total amount of unfunded pensions in the United States at between $730 billion and $4.4 trillion, with the smart money betting on the higher estimates. Systematic deficits of this sort do not just happen. Fierce union pressure, bad economic circumstances, and unsound pension design all contribute to the bottom line.

Defined Benefits v. Defined Contributions

Start with some pension basics. Most public pension dollars are invested in defined benefit plans, under which the state, county, or municipality promises its workers a pension benefit based on a complex formula that combines years worked with salary earned. The risk of variation in the stock market, or changes in longevity, is therefore borne in the first instance by the government entity, which has lately faced heavier obligations on both counts.

The alternative system, a defined contribution plan, puts the risk on the employee, whose payments are fully vested at the time they are made. The individual worker is then left to adopt an investment strategy to deal with the portfolio, subject to whatever distributional and diversification constraints are incorporated in the plan. Defined contribution plans leave no uncertain residual liabilities in the hands of the government. Benefits vest at once, and workers are free to take their pensions (like their individual retirement accounts) with them if they change jobs. Private pension plans have moved sharply in the direction of defined contribution plans.

The stresses on defined benefit plans are compounded enormously by the powerful role that unions play in negotiations. In boom times, government officials and unions both found it easier to use deferred compensation in the form of defined benefit plans to protect themselves from public criticism of generous compensation packages. Now, everyone knows that there is a problem, but no one can agree on a common cure. Any structural pension reform that requires union consent will lead to concessions that in practice will prove both too little and too late. Only unilateral modifications by the government employer can save the day. The question is this: How can the government best roll back pensions in ways that satisfy key economic requirements without running afoul of serious constitutional concerns?

The Economic Issues

The first problem with pensions is figuring out what the government employer’s liabilities are. The six-fold difference in estimates of total pension liability reflects the difficulties of that task. Pension obligations must be sustainable for the long run, requiring projections spanning generations. Figuring out rates of return is no picnic. Indeed, multiple market gyrations have left the Dow about 11 percent below 2000 levels in real terms, adjusted for inflation. The needed revenue is just not there.

Pension valuation also heavily depends on the precise formulas used to calculate the payoffs. Defenders of the current system point to the moderate annual pensions for retired workers. Detroit pensioners receive an average pension of $19,000 per year, hardly a princely sum. Their union defenders point to this low figure as evidence that these pensions should remain intact throughout the bankruptcy process.

But the correct conclusions depend not only on the annual payments, but also on the total burden any individual pension places on the overall system. Take a worker who retires after 25 years of service, whose pension equals, say, 75 percent of his last salary. That obligation could kick in at age 50, at which point the prudent pension plan administrator must shift its investment from equity to bonds to fund current obligations. But debt instruments unfortunately lower the overall rate of return. That same pension payable at age 65 is a pale shadow of the first plan, because the pension fund has an extra 15 years over which to accumulate the wealth needed to service the pension, and 15 fewer years over which the money has to be paid out. The crushing county or municipal debt comes from the total size of the obligation, not the yearly payments.

Similarly, this annual figure does not capture the worker’s position. Workers who retire early often take second jobs, which provide social security, whose own bizarre compensation formula favors parties who enter the workforce close to retirement.

The Legal Issues

The great legal challenge in all these cases is when the pension rights negotiated in the original employment contracts should “vest” so as to receive protection against unilateral variation by local governments. The Constitution in Article I, Section 10 commands with deceptive simplicity that “No state shall. . . pass any . . . law impairing the obligation of contracts.” Many state constitutions contain similar provisions. The issue came to a head in recent litigation in San Jose, where the estimated unfunded liability for the pension plan was put at $3.7 billion. Under the leadership of San Jose Mayor Chuck Reed, San Jose adopted “Measure B” by referendum in 2012, which let the City trim, but not eliminate, pension benefits in order to release funds to restore key city services.

The unions promptly challenged Measure B in court, where they won a major victory before Judge Patricia Lucas, who held that Measure B violated the vested rights of union members. By way of full disclosure, I have given some informal advice to Mayor Chuck Reed about how to attack that decision on appeal. The gist of this dispute lies in the interaction between the key provisions of the San Jose City Charter and California case law on vested pension rights. San Jose has two defined benefit plans, one for uniformed services and one for its “civilian” employees. The Charter explicitly reserves to the San Jose legislature the right to “alter or amend” each plan unilaterally. However, this authority does not explicitly include the power to revoke the pension benefits. On its face, it appears that the Charter lets the City cut down pension benefits, without setting out a formula defining how to do so.

California pension law cases, without careful analysis, have evolved to freeze minimum pension levels for all employees the moment that they take their jobs. Workers may be dismissed or demoted from their jobs, but the pension structure is said to remain inviolate as a result of two key decisions. In Kern v. City of Long Beach (1947), the California Supreme Court held that a pension could not be repealed in its entirety just before a Long Beach fireman was about to retire, which would have stranded covered workers high and dry. Fair enough. However in 1955, and without serious reflection, that rule morphed in Allen v. City of Long Beach to require that any “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages."

The gap between Kern and Allen is enormous, for while the former prevents the City from taking advantage of its workers, the second neuters the power of local governments to alter and amend, by wiping out all government flexibility to correct prior errors in pension program design or funding. That rigidity is exceedingly costly for two reasons: first, because of the obvious difficulties in making any once-and-for-all estimate of future pension benefits, and, second, because it creates a built-in ratchet whereby any future increase in pension benefits is permanently added to the base, without the possibility of further reduction. The upshot is a financial death spiral.

Clearly, the Charter language can only be made effective by finding some middle ground between total flexibility and total rigidity. Indeed, that middle ground is constitutionally necessary in light on the well-established proposition in Stone v. Mississippi (1880): “All agree that the legislature cannot bargain away the police power of a State.” The legislature cannot permanently contract away its right to govern. This search for the middle ground ultimately rests on the notion of “good faith modification” that plays a central role in the ordinary law of contract by requiring anyone with the unilateral power to modify existing arrangements to take due regard of the interests of the other claimants on public funds. San Jose Measure B sought to do this by limiting the amount of pension reductions to those needed to deal with its estimated $3.7 billion shortfall, without cutting off anyone entirely as in Kern.

To be sure, the determinations of good faith are difficult to make, but it is surely better to tolerate some ambiguity at the margin than to force the City, which has multiple fiduciary obligations, to make wholesale cuts in its current programs, cuts that might include the size of its police and fire forces, the maintenance of its parks and schools, and various welfare programs. In her opinion, Judge Lucas heroically sought to confine her inquiry to “one of law, not of policy,” and thus missed the key point that the pension straight jacket has political as well as legal consequences.

 All of these consequences can be avoided ex ante by holding that pension rights “vest” only for work completed. Just that position, for example, is taken in the Michigan constitution, which in Article IX, Section 24 states: “The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” That definition is consistent with San Jose’s Measure B, and leaves it to another day to answer the question of whether federal bankruptcy law can force reduction in all unsecured claims, including those that are fully vested in retirees under state law (as Judge Steven Rhodes held could be done in the Detroit bankruptcy).

This correct definition of vesting is consistent with federal contracts clause jurisprudence that denies the government the unilateral power to alter and amend. Thus in United States Trust v. New Jersey (1977), the Supreme Court held that the state could not strip a secured lender of his right to the property pledged to the loan. Likewise in United States v. Winstar (1996), the Court applied ordinary principles of contractual interpretation to bind the government to its promise to count good will against the capital requirements of the bank when it assumed liabilities on which the federal government was guarantor.

The key ground of distinction is this: in both United States Trust and Winstar, the private party had performed in full, so that they had no option to leave the transaction if the government changed its terms. With the future pension, the workers do have the option to leave the job—an option they will exercise if the cutbacks are too extreme. There is in effect a self-help mechanism available to San Jose’s workers that was not available to either the United States Trust or Winstar. For good reason, the federal case had the open-ended “alter and amend” language found in the San Jose Charter. The faithful adherence to contractual language makes it equally imperative not to read into an agreement an “alter and amend” clause that is not there. But by the same token it makes it indefensible to take that same clause out of a charter.

San Jose and other local governments could be on the brink of bankruptcy. The unions are playing a reckless game. If they don’t back off, they may dig the bankruptcy hole deep enough that their fully accrued benefits could easily be put in jeopardy as well. California’s appellate court should affirm the constitutionality of Measure B, and avoid a far worse fate.

Consider This a Warning: Unpaid Interns

Thomas Warns*

Unpaid internships have come under fire recently, as a swell of class action lawsuits have been filed in the last year against companies that use unpaid interns, even whilst the number of unpaid interns reaches close to 2 million people per year. This past week Linda Federica-O’Murchu wrote an article for NBC News articulating the views of defenders and critics of the unpaid internship. While you should read the informative article here, below is a snapshot of the two competing schools of thought:

It's easy to see why unpaid interns are replacing salaried employees at some companies. Employers know they can fill vacant positions with a virtually unlimited supply of bright, hard-working young helpers, and at the same time try them out risk-free for future paid positions. Many interns said they benefit from the arrangement as well, by obtaining valuable on-the-job training and greater employability…

"Interns say, 'I'm just doing this to get my foot in the door of this industry.' But it's not that simple," Glatt said. "We had an unpaid intern picking up performers and driving them to and from rehearsals. Teamsters handle transportation on films. When they found out what was happening, they rightfully reclaimed that job. 

"The interns that are taking out the garbage and sweeping the floor—that's somebody's union job."

Are unpaid internships a valuable part of a young professional’s career or is it just an opportunistic attempt by companies to save money at the expense of full-time employees? Should they be legal at all?

Perhaps complicating the conundrum is the majestic simplicity of the arguments for both sides. On the one side, it seems obvious that people should be paid for their work. Equally obvious is the fact that unpaid internships are voluntary associations, and that workers can gain benefits from employment besides a paycheck. If companies were forced to pay interns the minimum wage, many might opt to do without their help altogether. What is a policymaker to do?

One solution would be to get the government out of the way. As this Forbes article points out, the legal battle to get interns paid centers around the Fair Labor Standards Act of 1938, and the Labor Department’s regulations that followed it. The Labor Department has a six-part test to determine whether an intern should be paid; among the six prongs are requirements that the job has to be “for the benefit of the intern,” the intern doesn’t displace paid workers and the employer “derives no immediate advantage” from the intern’s activities. This amorphous standard basically says that the internship must be for the benefit of the student, not the employer. This is interesting, since most private contracts/business arrangements are entered into on the premise of mutual value. Companies aren’t expected to teach raw college graduates important job skills with no expected benefit, are they?

unpaid interns.jpg


Regulations Threaten Mutual Benefit

It may be helpful to glance briefly at what the author did this summer. The author was one of about ten interns in the Major Offense Bureau at the Nassau County District Attorney’s Office (the numbers fluctuated throughout the summer). The County provided no remuneration for interns, although the author received funding from his law school, as did some interns from other law schools; some merely received credits. The first week or so, we had few opportunities to do substantive work, mostly digesting lectures on different crimes which the office prosecuted and observing a variety of motions and hearings. There was also dreaded photocopying. At this stage, our value to Nassau County was probably close to $0 per hour.

By week ten however, the situation had palpably changed. Many of us were gaining valuable experience writing motions and memos to be submitted to the court, or researching a variety of legal topics for Assistant District Attorneys. Some even accompanied ADAs to hearings in order to research cases cited in opposing counsels’ arguments and help form a response. Our value certainly exceeded $0 per hour, but no one thought we were being taken advantage of; the benefits of an automatic second-round interview for a full-time job, building our resumes, and having built important connections with superiors in the office were valuable rewards.

But would the Department of Labor condemn this mutually beneficial arrangement? Is it clear that our employer discerned “no immediate advantage” from our activities? After all, every hour we spent writing a brief or doing research saved a similar amount of time for ADAs to work on different, potentially more important matters. Did the amount of work we performed take away a job from a paralegal or other member of the office’s support staff?   

If the County were forced to pay us the minimum wage because of the Labor Department regulations, we likely would have been on the street with no internship and no paycheck in a heartbeat. It was no secret walking through the shabby courthouse that Nassau County has budget woes, and that intern pay would not be a priority. This would have been a disservice to both sides caused by the regulators trying to help us get paid at least minimum wage.


The Minimum Wage and Volunteerism

One pervasive criticism of unpaid internships is that they favor middle and upper class interns who can lean on their family’s wealth while they are not being paid, at the expense of those without such an advantage. But what if the minimum wage law didn’t exist and Nassau County (or other businesses, firms, etc.) could only afford to offer $3 or $4 an hour, enough say for gas to go to and from the internship and buy groceries? This would help bridge the resource gap among interns to an extent, and allow interns more choice in balancing where to work with a wider variety of paid employment. Where employers once cried that they couldn’t afford to pay interns at all, they may suddenly find themselves bidding higher (though potentially still below minimum wage) to secure students from better schools or with more work experience.

What about the union boss who whines about hungry interns taking away union jobs sweeping floors and taking out the garbage? The complaint is ironic, since many unions rely on apprenticeships (a.k.a. unpaid interns) to train new workers, and indeed their jobs wouldn’t be in jeopardy if they didn’t push wages for unskilled labor so high. While it is possible that allowing the interns to usurp these “union jobs” like taking out the garbage and cleaning up on the set of the Black Swan may have been a violation of a contractual agreement between labor unions and Fox Searchlight, it seems unlikely a wily intern had nothing to gain by having such close contact with figures inside the movie industry for an extended period of time.  If the internship was not worth their time and effort, they were always free to quit thanks to the 13th Amendment. Like many other companies, if forced to pay the minimum wage to interns Fox Searchlight might decline to hire interns at all, robbing many young professionals of a chance to gain some exposure to the industry.

If we are so concerned by unpaid internships, should we ban volunteerism as well? Indeed consider the perversity that our minimum wage law creates right now. A boy scout can work to sell baked goods outside a Walmart and raise $4 per hour to finance his Little League baseball team, but if the store manager invited him to come inside and bag groceries for $6 per hour towards the Little League team, he would be vilified as a law-breaker and robber baron – two voluntary transactions, two wildly divergent outcomes. Common sense prevents bureaucrats from banning volunteer activity, but unfortunately common sense is not enough to knife through every set of unhelpful regulations.

 *Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."

ObamaCare Cuts Unions a Break

Today, The Wall Street Journal highlighted the fact that under the Affordable Care Act, unions are exempt from the "reinsurance tax." The tax, which is approximately $63 per person in 2014 is intended to capitalize a $25 billion reinsurance fund which will compensate exchange-participating insurers who are incurring higher costs than expected. The WSJ, detailed this tax break as follows:

In an aside in a Federal Register document filed this month, the Administration previewed its forthcoming regulation: "We also intend to propose in future rulemaking to exempt certain self-insured, self-administered plans from the requirement to make reinsurance contributions for the 2015 and 2016 benefit years."

Allow us to translate. "Self-insured" means that a business pays for the medical expenses of its workers directly and hires an insurer as a third-party administrator to process claims, manage care and the like. Most unions as well as big corporations use this arrangement.

But the kicker here is "self-administered." That term refers to self-insured plans that don't contract with the Aetnas and Blue Shields of the world and instead act as their own in-house benefits manager.

Almost no business in the real world still follows this old-fashioned practice as both medicine and medical billing have become more complex. The major exception is a certain type of collectively bargained insurance trust known as Taft-Hartley plans. Such insurance covers about 20 million union members, and four out of five Taft-Hartley trusts are self-administered.

There's no conceivable rationale—other than politics—for releasing union-only plans from a tax that is defined as universal in the Affordable Care Act statute. Like so many other ObamaCare waivers, this labor dispensation will probably turn out to be illegal.

And by the way, this favor harms all other taxpayers. The IRS assesses the reinsurance tax in annual tranches; it must collect $12 billion in 2014, $8 billion in 2015 and $5 billion 2016. So the smaller pool of ordinary people without a union card will pay a larger individual share of the same overall amount.

And so, ObamaCare's notoriety continues to grow at a record setting pace.

Unions Take High Culture Hostage

Richard Epstein

This past week featured two stories about major orchestras dealing with their adamant unions. The first incident occurred on Wednesday, October 2 at Carnegie Hall in New York City. A fancy opening night gala, featuring the violinist Joshua Bell and the young jazz performer Esperanza Spalding, was called off due to a surprise strike by Local One of the International Alliance of Theatrical Stage Employees.

The second dispute, still unresolved, involves the protracted labor impasse at the Minnesota Orchestra. On October 1, true to his promise, star music director Osmo Vänskä resigned because of the inability of the orchestra and its musicians’ union to hammer out a new contract in time to prepare for concerts scheduled at Carnegie Hall on November 2 and 3. The issues in these two labor disputes could scarcely be more different. But each of them, in its own way, illustrates the long-term toll that American labor law takes on the cultural lifeblood of our nation.

The Stagehands at Carnegie Hall

The incident at Carnegie Hall raised more than a few eyebrows when it was revealed that the strike was organized by the five full-time Carnegie Hall stagehands who were members of Local One. Their annual compensation in wages and overtime averaged a cool $419,000 per year, making them—one properties manager, two carpenters, and two electricians—five of the seven highest paid workers at Carnegie Hall after Carnegie CEO Clive Gillenson. Other union members in unspecified numbers were called in to help from time to time, presumably at rates on par with those Carnegie Hall paid to its full time workers.

As befits the sorry state of labor relations in the United States, the dispute was not about the status of these five workers. Rather, it focused on the new jobs that would open upon the completion of a new education wing in 2015. Mr. Gillenson was not exactly breathing fire when, well-coached in the pitfalls of labor law, he eschewed any anti-union sentiment and announced that he expected union workers to take the stagehand slots in that new facility. It was just that he insisted on dealing with unions that lacked the clout and the wages of the hardy men from Local One.

Local One’s President James Claffey Jr. was quite unapologetic about his opposition to this plan. His public statement read in part:

Carnegie Hall Corporation has spent or will spend $230 million on its ongoing studio tower renovation, but they have chosen not to appropriately employ our members as we are similarly employed throughout the rest of Carnegie Hall. . . .

Carnegie Hall Corporation continued for 13 months to fail to acknowledge the traditional and historic work that we perform, and after no significant progress, we found it absolutely necessary to take action to protect the members that we represent.

The economic realist offers this translation of Claffey’s brief utterances. The management now wants to expand its business. We know that it has sunk about $230 million into a new facility, so we want to extract some portion of that money by having our workers tax that new venture by supplying these services at outlandish rates. That implicit tax, moreover, is not small. Assume that the unit contains about six full-time stagehands, and the total labor bill for their services is around $2,500,000 per year.

On the generous assumption that these union members working in other facilities earn about $100,000 per year, Carnegie Hall pays out annually in monopoly rents to these preferred union workers about $2,000,000, more or less in perpetuity. On the assumption that Carnegie Hall’s investments throw off about 5 percent per year, it takes $40 million in endowment to service these claims, which works out to about $8 million per worker, present or future.

The question then arises: why did Carnegie Hall choose to make a stand at this moment. Mr. Gillinson never once challenged the legitimacy of the current exorbitant labor costs at Carnegie Hall. Instead, he objected to Local One’s desire to expand its turf. He did so because he knew that Local One was in part a captive to its own exorbitant contracts. Thus, if those five workers went out on strike to secure the new positions, at a minimum they would have to forfeit their juicy compensation for the duration of the strike, with no opportunity to recoup those gains once the strike was over.

In essence, the union ploy to expand its power may have given some benefits to a few other members of Local One, but not those on strike. The management for its part knew that by holding relatively firm they could cut out a major expense that would offset its short-term losses.

Of course, in any strike, the positions of both management and labor matter. In this case, Local One had more to lose from the strike than did Carnegie Hall, even if it remained closed for a number of performances. So it was not surprising that the strike settled on ambiguous terms within two days. The union got to preserve the status quo ante on the concert hall for at least another four years. But the final settlement also “includes limited jurisdiction for I.A.T.S.E. Local 1 in Carnegie Hall’s newly created education wing.”

Cashed out, that limited jurisdiction appears to allow a single new Local One member to perform limited tasks in the new wing for reduced wages. Think of this as a charge on endowment of approximately $2 million, compared to the $25 million or so that the union wanted from three new full time employees. Thus, peace was restored in our time.

The Case of the Minnesota Orchestra

The bargaining dynamics could not have been more different in the Minnesota dispute. It is no secret that unionized musicians command a short-run monopoly premium for their members. The orchestra knows that it can earn back some fraction of that wage premium by securing the most talented musicians. But by the same token, any generous deal opens the orchestra up to financial ruin if its endowment shrinks or if its key donors cut back their support in hard times. But usually the large gains for older musicians carry the day.

Unions in all industries—think of the debacle at General Motors—do not do well in negotiating givebacks to management. Yet, ironically, the higher the premium that unions are able to extract during good times, the larger the give-backs are needed to bring the employer’s fiscal position into balance during bad times.

 Just that dynamic was in play with the Minnesota Orchestra. The high wages before 2009 led to one round of union concessions. But in 2011, the budget was still out of balance, and management came back with a request for further cuts of about 32 percent. It later softened its demands to insist on wage cuts that would reach 25 percent after three years. Those cuts would be offset by a one time $20,000 bonus, which would, of course, not be part of the wage base in future years.

The union proposals were for pay cuts in the range of six to eight percent. This would have left an annual deficit in the order of $6 million. In the end, no deal could be reached, which precipitated Vänskä’s departure and the subsequent huge hit to prestige of the orchestra’s hard-earned international reputation.

Even now, it seems clear that the disappointed musicians will be worse off without their jobs than they would have been if they had accepted the least attractive offer they received from management. But with each side accusing the other of steering the car over the cliff, these smash-ups are to be accepted. Vänskä, it appears, will come out fine.

What Next?

One of the most disheartening features in the coverage of these two disputes is the unwillingness of any of the commentators to think seriously about the kind of major structural reforms desperately needed to reduce the risk of system-wide failure, which occurs not only in music, but also, most obviously, in professional sports. At various times, the well-heeled athletes in baseball, basketball, football, and hockey have forced shutdowns that they later came to regret. Today, the common discussion is confined to second-order questions of proper bargaining strategy coupled with pious demands for social responsibility on all sides. But these palliatives cannot alter the fundamental bargaining dynamics under current labor law.

The sad truth is that American law during the period from about 1914 to 1940 committed itself to the creation of monopoly unions in the name of the public interest. Union defenders insisted that stronger unions would increase overall purchasing power to fuel economic growth for the middle class, or that only strong unions could offset the employer’s superior bargaining position. These rationales led to giving many unions exclusive bargaining rights with employers that necessarily imposed huge costs on the employer, and losses on non-unionized workers, frustrated suppliers, customers, and the public at large. But these system-wide losses from strikes and lockouts were deemed justified for the lofty end they helped to achieve.

In recent years, industrial unions have lost their power because the firms that they seek to unionize do not have any ability to raise wages given the rising competition that unionized firms face in their own product or service markets. So overall, the union movement in the private sector is in decline. But in certain niche professional markets, competitive constraints from new entrants are far weaker, as there is little if any direct competition for either the Carnegie stagehands or the Minnesota musicians.

But it is equally clear that five workers who can shut down an entire opening night gala can garner more gain per worker than the hundred or more members of a struggling symphony orchestra. So the union bargaining cycle gives stagehands far greater returns, and, with a jurisdictional strike, a far stronger incentive to settle. The orchestra members, on the other hand, can only bargain over the decline in their real wages given the limited revenues available.      

The union leaders and their backers, who tout the wage increases and benefit packages from successful actions, do not recognize the heavy toll that their actions impose on everyone else. In today’s intellectual climate, unrepentant progressives like New York’s mayoral apparent Bill de Blasio continue to prime the pump and garner ecstatic union endorsements, by speaking as if their progressive agenda has a proven track record of success in rehabilitating the fortunes of the middle-class.

Don’t believe it. Happily I am not running for public office, so I am not reluctant to note this singular truth about labor relations. Forget the searing populist rhetoric; competitive markets that allow for free entry and continuous wage and benefit adjustments will produce far better results over the long haul than monopolistic unions that say they advance so-called social justice. It is foolish to think that this current form of regulated toe-to-toe combat can be tamed with some subtle tweak in labor law. The entire system has to be dismantled root and branch to prevent the Minnesota meltdown, the stagehand strangulation, and, more ominously, the coming disintegration of New York City.

Fast Food Workers Strike Out Swinging

Thomas Warns*

On Labor Day, Ned Resnikoff asserted in an article posted on that the recent nationwide fast food strike has the potential to revive the long flagging American labor movement. In particular, Resnikoff stated:

“Over the past several months, a new kind of labor activism has emerged from some of America’s poorest-paying and least-unionized industries. Fast food workers have stood near the forefront of the movement, waging a nationwide strike campaign which began in December with about 200 New York-based fast food employees and now encompasses thousands of workers spread across 58 cities…If the fast food workers achieve tangible results, it could transform low-wage fast food and retail in the same way that the United Auto Workers (UAW) and other unions helped to transform manufacturing during the 1930s. Their efforts, combined with the stimulative impact of World War II, helped birth a new American middle class and an organized labor Golden Age.”

Although the burgeoning fast food labor uprising may be sending chills down the spines of some franchise owners, its impact on employers, employees, and consumers is still far from certain.

Fast Food Strike.jpg

The employees who are striking for $15 an hour attract some sympathy from the public when juxtaposed with the multi-billion dollar revenues companies like McDonald’s, Subway, and Wendy’s rake in every year. But this David vs. Goliath comparison is hollow on two levels: first, the overwhelmingly majority of fast-food workers are employed by franchisees, not the parent corporations; second, wages are determined primarily on the skill required for the work and the scarcity of replacement workers. Unfortunately for the fast food strikers, the low amount of skill required and the ease with which their jobs can be filled severely undercuts their bargaining strength.

In light of such weaknesses in their cause, the strikers appear to be picketing with an eye towards Washington. As this article notes, the protests may just be a way of influencing politicians to raise minimum wages at the state and federal level if the franchises should refuse a wage increase. There may be sufficient political capital on Capitol Hill and in state legislatures across the country for such legislation if, as some have indicated, the large increase in employee wages does not lead to a corresponding significant price increase at the register. However, the LA Times indicates that “a $15 minimum wage would cause as much as a 17% surge in fast-food prices.” Although consumers may not like such a spike in prices in the historically value-based fast food industry, such an increase doesn’t seem crippling to the strikers’ call for increased wages.

But what about Resnikoff’s bit comparing a revival in fast-food labor activism to the rise of the UAW in the 1930s? That comparison should draw both hope and peril for strikers and their supporters. The UAW did succeed at providing middle class wages for union employees, and if the same happened in the fast food industry, turnover would likely plummet (it is estimated to be around 75% every year in the industry). On the other hand, the high wages the UAW bargained for are often cited as a cause of the decline of the American auto industry. While it is impossible for fast food businesses to outsource the kind of work performed by line food-prep workers, higher wages could influence franchisees to cut employment or turn towards automation, two trends the UAW have encountered. If prices do increase significantly for customers, their consumption habits might change and further drop the demand for workers in many stores.

While the appeal of a $15 wage is obvious for fast food workers, they may be better off if Washington and the labor unions stay out of the picture, and the strikers negotiate a smaller price increase that would be closer to a coveted “living wage” without undermining the very existence of the strikers’ jobs.

*Thomas Warns is a J.D. Candidate, class of 2015, at New York University School of Law and is a Staff Editor of the Journal of Law & Liberty.