October 8, 2013

Unions Take High Culture Hostage

Carnegie Hall is symbolic of how our current system of labor law can destroy our civic institutions.

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.

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Illustration by Barbara Kelley

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. 


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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