April 26, 2011

Senseless in Seattle

The Obama administration tells Boeing how to run its business.

It has long been an open secret that the Obama administration regards itself as an eager and reliable ally of organized labor: whatever labor wants, labor gets. Nowhere is that fealty more evident than in the National Labor Relations Board ("NLRB") decision to file unfair labor charges on behalf of the International Association of Machinists and Aerospace Workers union against the Boeing Company. Why? Boeing had the audacity to invest $2 billion in a new South Carolina facility where it would assemble its 787 Dreamliner---a job that Boeing assigned to 1000 non-union workers starting this coming July.

Epstein
Illustration by Barbara Kelley

Acting NLRB General Counsel, Lafe Solomon, wants that work to be brought back to Washington state and the Portland, Oregon area, where Boeing has its current Dreamliner facilities. According to Solomon, "[a] worker's right to strike is a fundamental right guaranteed by the National Labor Relations Act. We also recognize the rights of employers to make business decisions based on their economic interests, but they must do so within the law." But it is the boundary line between an employer’s unfair labor practice and its own legitimate economic interest that Solomon badly misunderstands.

The gist of the government’s case is this: in deciding to locate the production facility in South Carolina, Boeing executives engaged in "coercive" speech, with the intention of discouraging future union strikes and of retaliating against its west coast workforce. After all, the Boeing executives cited past union strikes, and the possibility of future ones, when they announced their decision to open the South Carolina production facility.

In fact, the union has gone on strike five times in the last 24 years—1977, 1989, 1995, 2005, and 2008. That last strike lasted some 56 days, with obvious disruptions in production. The worse the relationship with labor, it seems, the greater the legal duty an employer has to take it on the chin the next time around. The incentive structure here is perverse. If a union maintains good relations with the firm, it would be easy for the firm to leave, because it would have no anti-union animus. Yet ironically, the firm has incentives to stay. But on the government's theory, that option to exit the market could easily be prevented by a union that has kicked up a ruckus time after time, for now an anti-union sentiment is easy to prove or infer. It cannot be, as Solomon contends, that bad union behavior gives the union an exclusive lock on a firm's future business. Never has bad behavior had such a high payoff.

Never has bad union behavior had such a high payoff.

In response, Boeing’s management stated the obvious when it noted that this decision to expand its facilities in a right-to-work state like South Carolina was needed to diversify its labor relations and take steps to minimize the financial threat to its bottom line. As a faithful fiduciary to its shareholders, the company could hardly have done anything else. Indeed, a sane person who is not versed in the intricacies of the New Deal-era National Labor Relations Act ("NLRA") might suppose that the government’s case is just a mad fantasy. But a closer look at that statute shows that this unfortunate tussle has its origins in the basic structure of modern American labor law.

To understand why, it is critical to note just how heavily the labor statute is tilted toward unions in the first place. The NLRA did what most New Deal legislation sought to do: it opened the door for employees to exercise their statutory rights of "concerted action," thereby allowing unions to exert their monopoly power in ways that were designed to disrupt competitive labor markets. The workers had the right to choose a union by an election, after which the employer was duty bound to negotiate with that union "in good faith" until the parties reached an agreement or until the entire process broke down, at which point an employer lockout or an employee strike could take place. This highly dysfunctional arrangement was thought preferable to the ceaseless small adjustments of wages and terms of conditions that characterize competitive markets.

In order to ensure that employers could not escape their statutory obligations, the law made it an "unfair labor practice" to engage in actions that either "coerced" employees or "discriminated" against them for their union involvement. In effect, the employer could refuse to enter into any specific agreement with a union for "economic" reasons but not if it sought to undermine the union.

The basic problem with this motive-based scheme is that virtually all rational economic motives require an employer to resist the higher wages and strict work rules that follow unionization. At this point, it becomes a ticklish matter to determine which motive, union antipathy or economic rationality, drives the employer resistance. American labor law thus encourages employers to hire grammarians to couch their objections in the right terms, and to speak only at the right times. Indeed, one reason why Boeing got into trouble in this case was that it announced union difficulties, as opposed to cost savings, as the reason for its decision to open the South Carolina plant. Candor comes at a high cost in labor relations.

Boeing has no duty to bargain with the union on the placement of its new facilities.

The question, though, is whether these employer statements add up to an unlawful labor practice. Cases prior to Boeing have clearly established that decisions to fire workers for their union activities are a form of retaliation that requires firms to provide both back-pay and reinstatement. The law, however, was always a muddle when the employer reorganized its efforts in ways to minimize its exposure to union threats. Literally dozens of cases ask the question of whether a decision to "contract out" certain union work to outside firms counts as retaliation against union members, or whether it is a sensible decision to reconfigure businesses in a way to reduces costs.

Perhaps the most notable case of this sort is the Supreme Court’s 1965 decision in Textile Works Union v. Darlington Mills. That case introduced a set of complicated tests to determine whether shutting down a given facility in response to union pressure was an unfair labor practice. The result was a split verdict. It was never an unfair labor practice for a firm to go out of business altogether, solely to avoid unionization. But the Supreme Court required a far more delicate balancing act to decide whether the employer could close down one of several facilities in order to move that business elsewhere. Years later, the union in Darlington Mills won a major victory against the textile giant, Deering Millikin, for its "runaway" shops, and the textile industry never did recover in the South.

In my view, the nuanced Darlington Mills decision offers a sober reminder of just how far the NLRA has been read to protect unions. Any firm that is willing to close down its operation at one location in order to do business elsewhere has to incur huge costs to make good on its decision. That costly process should be understood by neutral observers as a measure of the level of sheer economic dislocation that unionization can wreak on firms that have to compete against nonunion firms on a daily basis for every dollar in sales.

But as bad as Darlington Mills is, the NLRB’s current suit against Boeing is far worse. Boeing has no duty to bargain with the union at all on the placement of its new facilities. The NLRA states that bargaining with the union is "mandatory" over the terms and conditions of employment. But placement of new operations is a topic of "permissive" bargaining, over which the employer has no obligation to bargain with a union in the first place. The union could raise the issue, and management can accept union proposals, but only if it chooses to do so. Boeing had that conversation with the Washington union. Those chilly talks persuaded Boeing to set up shop elsewhere. That form of union "discouragement" has always been accepted under collective bargaining law.

Is the National Labor Relations Act necessary? There is no good reason to spend public funds to create massive rigidities in labor markets?

In order to rope Boeing back to Washington, the NLRB argued that Boeing’s statements were in retaliation for past union strikes. That point is wide off the mark. Retaliation normally connotes a decision to get even with workers who have stood up to the employer’s demands. But unlike the employer’s decision in Darlington Mills, Boeing’s decision to open a new facility in South Carolina did not take away the job of a single worker in Washington state or the Portland area. Indeed, Boeing has expanded its workforce in that region by 2,000 workers. It is hard to see how the decision to hire new workers at a more favorable location counts as retaliation against existing workers who have not lost a single benefit under their existing labor contracts.

Put otherwise, the peculiar situation under the NLRA requires the law to strike a balance between the rights of workers to organize and the right of management to conduct its business as it sees fit. The government’s broad definition of discouragement and retaliation threaten to make all firms the wards of their existing unions by preventing those firms from starting new businesses in more favorable locations. When the NLRB backs these union demands, it shows its willingness at the eleventh hour to destroy $2 billion in Boeing’s site-specific investments to make a political point. The NLRB also puts a real crimp on the interests of shareholders and of workers in other locations. In a time of high unemployment, it treats the union interest as paramount, no matter how negative its overall effect on the economic fortunes of others.

That this outcome is remotely plausible under law should lead to a larger question: is the National Labor Relations Act necessary? There is no good reason to spend public funds to create massive rigidities in labor markets. The most effective way to keep system-wide wages high is to allow for employers to compete for labor by offering them higher wages and better conditions, in exchange for greater productivity. Employers will only be able to take these steps if they are in a position to manage their businesses as they see fit, with or without union blessing. Byzantine labor restrictions have laid low a generation of workers, union and nonunion alike, in the automobile, steel, tire, and construction industries. Why, pray tell, make airplane manufacturers next?


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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