Collective Bargaining = Collective Suicide

Tuesday, August 16, 2011

On Sunday, August 7, 2011, some 45,000 members of the Communications Workers of America (CWA), walked off the job and onto the picket line after their collective bargaining negotiations with Verizon broke down over the full gamut of employment issues.

On Friday, August 11, 2011, Verizon called in the FBI to investigate some 90 allegations of sabotage that occurred since the strike began. Landlines across the Northeast were cut, including those serving a hospital and a police station.

The CWA promptly issued a prepared statement that read, "CWA does not condone illegal action of any kind, and instructs its members to conduct all strike activities in accordance with labor law." That guarded statement, of course, did not deny the distinct possibility that individual union members, acting alone or in concert, were responsible for the cutoffs in service.

Illustration by Barbara Kelley

Union spokeswomen, Candace Johnson, also went on the offensive by accusing "Verizon replacement workers and managers of driving vehicles into picketing crowds, striking more than a dozen pickets," which Verizon promptly denied. The pickets carried signs that said the "CWA on STRIKE for MIDDLE CLASS JOBS."

This is the largest strike that has taken place in the United States in the past four years. The relative novelty of the event, and the strong recriminations it continues to engender, should serve as yet another reminder of the massive dislocations that can take place under the current legal regime that makes strikes and lockouts standard-issue weapons in the arsenal of unions and employers respectively.

What does this strike teach us about the institution of collective bargaining? Let’s start by examining the multiple sources of conflict between Verizon and the CWA. Verizon is a large and diversified communications company that competes aggressively in multiple markets, including its struggling unionized landline business and its prosperous nonunionized wireless business.

For many years, the CWA negotiated highly favorable contracts for its workers. Those rich union contracts have proved unsustainable. Inevitably, they have neatly set the stage for the thorny issues of give-backs, or reductions in workers’ previous gains in such key areas as, pensions, job security, health care, sick pay, job conditions, grievance procedures, and paid holidays. The company is pushing a hard line considering its annual revenues are expected to reach about $112 billion for the current year, with reported earnings for the first six months at $6.8 billion. Verizon’s top five executives, over the past four years, have received $258 million in salary and options, for an average of over $12 million per executive—per year—in total compensation.

The obligation of Verizon’s corporate officers is to maximize returns to the firm, not returns to the workers.

These numbers generate fierce resentment among CWA members. One field technician with 15 years of service with Verizon put it this way: "What they’re asking is hard for us to swallow because the company had profits of $22 billion over the last four years. They’re crying poverty, they say they can’t afford to pay us. We’re just not going to stand for it anymore."

Sentiments like these may have led the CWA and its members to think that a strike based on the general principle of ‘share the wealth’ would generate the support of the public. Tragically, the CWA has seriously overplayed its hand. The likely outcome of this strike is the CWA’s own shattering defeat.

Verizon’s bargaining position has nothing to do with either its poverty or wealth. It has everything to do with whether the renewal of the present CWA-Verizon contract makes economic sense for the company. The brute economics of the dispute has this bottom line: the wages of both union and nonunion labor depends on what each group contributes to the firm’s profitability. It does not depend on the overall profitability of the firm per se.


Now that most of Verizon’s growth is occurring in the wireless market, the nonunionized workers in that division could expect to benefit from its growth, but only in proportion to the added value they bring to the firm. Those benefits do not come only in the form of higher wages. They include greater job security, improved prospects for promotion with the expansion of the business, and the opportunity to get jobs elsewhere with their better and more valuable skills.


So should the workers in the nonunionized unit be forced to sacrifice some of their gains for the unionized workers? A clear "no" is the correct answer. If Verizon decided to spin off its wireless operations into a separate corporation, no one would think that the profits of this separate firm would have to augment the salaries of the workers trapped in an independent landline corporation. There is absolutely no good reason to give Verizon a perverse incentive to break an otherwise efficient business in two in order to keep its employment relations on an even keel.

The overall profits of Verizon are irrelevant to CWA’s claims against the firm.

The law of ratemaking for public utilities affords a useful comparison. Ratemaking is the process whereby public utility commissions, in such natural monopoly industries as electricity and power, set rates for their customers. One perennial issue in ratemaking asks how to compute rates of a single firm that has one regulated division and one freestanding business, which are functional parallels to Verizon’s unionized and nonunionized divisions.

In these ratemaking proceedings, the constitutional protection against confiscatory takings prevents the government from going overboard in the regulation of natural monopolies. The rates must be high enough to allow the firm a sufficient return on investment to attract and hold funds in the capital market.

In a famous 1920 case, Brooks-Scanlon v. Railroad Commission, Justice Oliver Wendell Holmes, Jr., wrote for a unanimous Supreme Court that the Railroad Commission could not reduce the rates that Brooks-Scanlon could charge its customers, simply because its unrelated lumber business had generated a handsome profit. After all, the rates charged to utility customers would not have been increased if the lumber business operated at a loss. The two businesses have to be treated separately even though they operate under the same corporate umbrella.

Once that insight is carried over to the CWA’s dispute with Verizon, the bottom falls out of the union’s case. The overall profits of Verizon are irrelevant to CWA’s claims against the firm. When Verizon points out that increased competition has reduced the profits of landline operations, it is also telling the union that the company’s landline business is worth less. The union now has few, if any, monopoly profits from the landline business to capture through collective bargaining.

Likewise, it is utterly beside the point that Verizon’s executives pull down hefty salaries. The way the firm spends its own revenues is its own business. If it can generate a $6.8 billion profit in a hostile environment, then that is good evidence that its executive team knows what it is doing. No shareholders are out there on the picket lines, nor are Verizon Wireless workers. The obligation of the corporate directors and officers is to maximize returns to the firm, not returns to the workers. So long as high salaries for key executives maximize firm profits, then CWA’s claims for equity should fall on deaf ears.

None of this registers with the CWA, whose latest ploy is to claim that Verizon’s tough position on give-backs is an unfair labor practice under the National Labor Relations Act (NLRA). The CWA’s claim that Verizon has refused to bargain in good faith looks like an idle ploy. Nothing in the NLRA requires firms to make concessions in negotiations. What we have, therefore, is a nasty stand-off between Verizon and CWA over how much CWA employees can get from Verizon before the firm decides that it is better off with no deal at all. Under current law, this dispute looks like a standard economic strike in which each side can use its potent economic weapons, including strikes and lockouts, to advance its position, wholly without regard to the effects on the public at large.

When that battle is fought to its bitter end, the CWA will come out as the loser. In dealing with these breakdowns in collective bargaining it is critical to identify the threat position of each side. Unilaterally, what can each do in order to escape the clutches of the other?

The union has seriously overplayed its hand. Its current show of bravado helps no one.

In this instance, most of the heavy artillery is in Verizon’s hands. It knows that its current CWA contract is a losing proposition for the firm. Right now, its ability to run the firm with replacement workers will allow it to keep its business going in the short run. Over the medium to the long term, Verizon should be able to invest more resources to capital improvements, and to contract out many tasks, which will reduce jobs for CWA members once the strike is over.

On the other side, the striking workers receive no unemployment insurance. Their strike benefits are a fraction of their current salary, and they may lose their jobs after the strike runs its course. The prudent union would recognize that its striking days are numbered, and seek to work out an honorable surrender for the benefit of its workers. Its current show of bravado helps no one.

There are two deep ironies in the current impasse. The first is that the strike lays bare one constant theme of union supporters etched on those picket signs—namely, that union members are the heart and soul of the middle class. That persistent and pretentious claim ignores all the nonunion workers at Verizon Wireless, as well as thousands of other small businessmen and women. The sad truth is that the CWA does not care about the middle class as such. It cares about its dues-paying members, whom this strike will ill serve.

The second irony hits a larger point: given today’s difficult job market, the current system of collective bargaining to impasse and strike is indefensible. The arrangement does nothing to improve overall productivity within the firm. And when the negotiations break down, strikes and lockouts impose tremendous dislocations on innocent third persons, such as customers and suppliers, for whom there is no compensation at all. Overseeing collective bargaining consumes large amounts of public resources as the National Labor Relations Board is forced to supervise this labor struggle and smaller ones cut from the same cloth.

Perhaps some grizzled veteran of the labor movement can explain why this model of regulated industrial warfare is better than the nonunionized labor market, which encompasses over 93 percent of the American private sector. When 7 percent of the labor force generates 95 percent of the social disruption to labor markets, it is time to rethink the system from scratch. Labor law reform that dismantles the NLRA is a lot cheaper than another misguided stimulus program, and much more compassionate than an unemployment rate that hovers around 9 percent.