Alternative Explanations of Union Wage Concessions

The airline wage concessions have become the topic of recent articles. See Cappelli Peter , “Competitive Pressures and Labor Relations in the Airline Industry,” Industrial Relations, Vol. 24 (Fall 1985): 316–338; and Northrup Herbert R. , “The New Employee-Relations Climate in Airlines,” Industrial and Labor Relations Review, Vol. 36 (January 1983): 167–181. See also Cappelli Peter , “Plant-Level Concession Bargaining,” Industrial and Labor Relations Review, Vol. 39 (October 1985): 90–104 on tires and meatpacking. For general studies of concession bargaining, see Flanagan Robert J. , “Wage Concessions and Long-Term Union Wage Flexibility,” Brookings Papers on Economic Activity 1 (1984): 183–216; Freeman Audrey , “A Fundamental Change in Wage Bargaining,” Challenge, Vol. 25 (July/August 1982): 14–17; Freedman Audrey Fulmer William E. , “Last Rites for Pattern Bargaining,” Harvard Business Review, Vol. 60 (March/April 1982): 30–48; Gay Robert S. , “Union Contract Concessions and Their Implications for Union Wage Determination,” working paper series, Board of Governors of the Federal Reserve System, August 1984; Mitchell Daniel J. B. , “Recent Union Wage Concessions,” Brookings Papers on Economic Activity 1 (1982): 165–201; Mitchell Daniel J. B. , “The 1982 Union Wage Concessions: A Turning Point for Collective Bargaining?” California Management Review, Vol. 25 (Summer 1983): 78–92; Mitchell Daniel J. B. , “Shifting Norms in Wage Determination,” Brookings Papers on Economic Activity 2 (1985): 575–599. Two symposia on concession bargaining appear in Dennis Barbara D. , ed., Proceedings of the Thirty-Fifth Annual Meeting, Industrial Relations Research Association, December 28–30, 1982 (Madison, WI: IRRA, 1983). An early review of concession developments appears in Bureau of National Affairs, Inc., Labor Relations in an Economic Recession: Job Losses and Concession Bargaining, special report supplement to the Daily Labor Report of July 16, 1982 (Washington, D.C.: BNA, 1982). The concession movement has provoked opposition in the labor movement. See Slaughter Jane , Concessions and How to Beat Them (Detroit, MI: Labor Education and Research Project, 1983).

Airlines were deregulated by the Airline Deregulation Act of 1978, trucking firms by the Motor Carrier Act of 1980, and railroads by the Staggers Rail Act of 1980.

Under a consent decree in 1982, settling an antitrust suit against AT&T, the company divested its local operating companies, which remain heavily unionized in their core telephone service. However, they have been able to enter new fields of communications, often using nonunion personnel. Various regulatory relaxations have permitted new entry into the long distance field. While AT&T's long distance service is unionized, most of the new entrants (Western Union is an exception) are nonunion.

For data, see Mitchell Daniel J. B. , “International Convergence with U.S. Wage Levels,” in Dennis Barbara D. , ed., Proceedings of the Thirty-Sixth Annual Meeting, Industrial Relations Research Association, December 28–30, 1983 (Madison, WI: IRRA, 1984), pp. 247–255.

For example, the trade-weighted U.S. dollar exchange rate index prepared by the Federal Reserve peaked at 177% of its 1979 value (173% in “real” terms, i.e., adjusted for changes in international consumer prices) during the first quarter of 1985. After the first quarter, the dollar declined rapidly. See Economic Report of the President (Washington, D.C.: GPO, 1986), p. 373.

Data and listings of settlements appear regularly in the Daily Labor Report. There is no precise and rigorous definition of a wage concession that can be given. However, settlements of zero or less are easy to identify and seem to capture most settlements that can be reasonably termed concessions. Obviously, settlements where the concession element involved nonwage items such as workrules will be omitted from such a classification if wage concessions were not also included. There is also a problem of using the zero or less criterion in a period of varying price inflation. A wage freeze during a period when consumer prices (CPI-U) were rising at a rate of 8.9% (as in 1981) meant a larger real wage loss than a freeze during 1985 when the price inflation rate was only 3.8%. Note, however, that the vast bulk of concession settlements in the survey discussed occurred during 1982–85, when the price inflation rate was quite steady, falling in a range of 3.8% to 4.0%, on a December to December basis.

Settlements were grouped by industry using the employer and union names as a guide. In some cases, where industry determination could not be made from the information provided in the Daily Labor Report listings, the employer was telephoned and asked for industry information. The following sectoral definitions were applied:

The deregulated sector was defined as airlines, trucking and warehousing, railroads, and communications.

The foreign trade sector was defined as metals, motor vehicles (and parts), rubber, machinery (electrical and nonelectrical), aerospace, paper and lumber, textiles, food manufacturing (except meatpacking), instruments, chemicals, furniture, cement, mining, transportation equipment (except motor vehicles and aerospace), brick-stone-clay (except cement), glass, leather, petroleum, ordnance, apparel, tobacco, and shipping.

The “other” sector was defined as construction, retail, foodstores (including associated wholesale operations), meatpacking, printing and publishing, health care, business services, unions (as employers), entertainment, hotels and restaurants, education, finance-insurance-real estate, retail trade (except foodstore), utilities, and public transit.

Obviously, these definitions cannot be precisely drawn since some settlements cross industry lines and since the influence of forces such as foreign trade can also cross industry designations. However, the results presented below would not be sensitive to reasonable redefinitions.

See Bureau of National Affairs, Inc., 1986 Briefing Sessions on Employee Relations: Workbook (Washington, D.C.: BNA, 1986), pp. 49–51

Discussion of two-tier plans can be found in Jacoby Sanford M. Mitchell Daniel J. B. , “Management Attitudes Toward Two-Tier Pay Plans: An Analysis,” Journal of Labor Research, Vol. 7 (Summer 1986): 221–237. The data on Table 1 with regard to two-tier plans, fixed-bonus plans, and profit-sharing plans exclude the construction industry where such plans are not generally feasible due to the casual nature of the worker-employer attachment.

This estimate assumes that the fixed-bonus plans were not found in the construction industry for reasons cited in footnote 9. See Bureau of National Affairs (1986), op. cit., p. 20.

A worker earning $10 per hour prior to negotiations and receiving three 3% annual bonuses in a 3-year contract will receive the equivalent of $10.30 per hour each year. The same worker receiving three annual 3% wage hikes would receive $10.30 the first year, $10.61 the second year, and $10.93 the third year.

See Jacoby Sanford M. Mitchell Daniel J. B. , “Employer Preferences for Long-Term Contracts,” Journal of Labor Research, Vol. 5 (Summer 1984): 215–228.

Other arguments have recently been put forward for profit sharing. Weitzman argues that employers with profit sharing have an incentive to hire more workers and to hold on to them during recessions. Weitzman Martin L. , The Share Economy: Conquering Stagflation (Cambridge, MA: Harvard University Press, 1984).

The data on major union coverage were drawn from Schlein David J. Brown Phyllis I. Sleemi Fehmida , “Collective Bargaining During 1986: Pressures to Curb Costs Remain,” Monthly Labor Review, Vol. 109 (January 1986): 16–3; and from Wasilewski Edward , “Scheduled Wage Increases and Escalator Provisions in 1980,” Monthly Labor Review, Vol. 103 (January 1980): 9–13.

The following industry classifications were used for the calculation: Meatpacking, airlines, construction, metals, trucking, transportation equipment, retail and wholesale trade, paper and lumber, machinery, apparel, rubber, maritime, leather, miscellaneous manufacturing, tobacco, transit, food except meatpacking, mining, furniture, instruments, finance-insurance-real estate, communications, services, textiles, railroads, printing and publishing, stone-clay-glass, petroleum, chemicals, and utilities.

The entry of the nonunion Michelin firm into the U.S. tire market is an example of type (a) erosion. The conversion of Continental Airlines to effective nonunion status in 1983 after declaration of bankruptcy is an example of type (b).

Freeman Richard B. Medoff James L. , What Do Unions Do? (New York, NY: Basic Books, 1984), pp. 52–54; Mitchell (1982), op. cit., pp. 166–167.

The housing component of the index included current mortgage interest rates which were generally rising during the 1970s. In addition, “imported” inflation from oil price hikes tended to reduce the ability to pay of U.S. employers (other than energy producers) rather than increase it.

The average rate of wage increase under private, major union contracts during the 1970s was 8.2%. Average hourly earnings rose at a 7.4% annual rate. The union weight in average hourly earnings is not known, but a reasonable estimate of the union payroll as a percentage of the total payroll included in the average hourly earnings estimates would probably fall in the 30% range. (Recall that average hourly earnings exclude groups of workers with low unionization rates such as supervisors). If the union wage increase is discounted to 8% (since union settlements for smaller units may not have kept pace with those for larger units), the nonunion rate of wage would have been 6.8% to 7.1%, depending on the weights assumed.

The simple average of industry concession rates for the period 1981–85 was about 14%. Industries with concession rates above 14% were designated as most concession prone on Table 2, and others as least concession prone. The industries used were those listed in footnote 7. In addition, two industries—transportation services and pipelines—which were not used for the sectoral classifications, but which appear in some tables in the Daily Labor Report, were placed in the least concession prone group.

Unfortunately, there are no detailed time series for union wage rates by industry. It is well known that in the pre-concession period, the overall union/nonunion wage differential was rising. This tendency can also be confirmed within such broad classifications as manufacturing and construction. Presumably, unions are stronger in industries in which they represent a higher fraction of the workforce. There is a correlation between the proportion of the workforce organized and the rate of average (union plus nonunion) wage increase across industries. For example, if the industries listed in footnote 15 are ranked by unionization rates (of the type shown on Table 2), those with above average unionization exhibited a simple average rate of increase of compensation per full-time equivalent employee of 8.2% per annum during 1965–80. Those with below-average unionization (including transportation services and pipelines, for which unionization data were riot available) exhibited a 7.2% increase. However, it is impossible from these data to separate out the impact of higher unionization on the rate of union wage increase from the impact of the higher weight union wages have in average wage increases in highly unionized industries.