Challenging Times for Unions

On page 466 of your textbook, the point is made that sometimes employees are represented by unions who negotiate on their behalf for things like wages, benefits, and the terms of their employment. In Canada, about 30 percent of non-agricultural workers belong to unions. Union membership is concentrated in public sector organizations, which account for 43 percent of all union members, but provide only 19 percent of Canadian jobs. In some industries in the private sector, unions have historically been quite successful, but in recent years they have faced increasing difficulties.

During the last few decades, dramatic changes have taken place in the way business firms operate. Several developments—including the globalization of business, free trade, and intense cost competition—have affected all types of Canadian businesses. As managers try to achieve greater cost efficiencies, they have put increased pressure on unions and the workers they represent. The practical impact of these changes can be clearly seen in the difficulties facing unions and unionized workers in the auto industry.

In 2007, the Canadian Auto Workers (CAW) union struck a deal with Magna International, Canada's largest auto parts manufacturer. It's called the "Framework of Fairness," and it has the following elements:

  • the union gets the right to try to unionize workers without interference from Magna management
  • the union agrees not to strike if it is certified as the sole bargaining agent for the workers
  • union members who want to be appointed as "employee advocates" will be assessed by a "fairness committee" which is made up of both union and management members
  • union members are not to view the employee advocates as union representatives
  • workers do not directly elect their own local leadership
    • When the Ontario Federation of Labour met late in 2007, this deal generated considerable debate. Not surprisingly, some union supporters are vigorously opposed to the deal, and argue that it undermines independent democratic unionism. They are particularly concerned that by giving away the right to strike, the CAW has lost one of the few levers it has to make management pay attention to its demands. Buzz Hargrove, the president of the CAW, has defended the deal on the grounds that the rapidly changing environment of automobile manufacturing in Canada is forcing the union to adopt new and innovative strategies.

      Concern about the specifics of the Magna deal is just one of the difficulties that Hargrove has to cope with. More generally, the loss of many high-paying jobs in the automobile industry (auto assembly and auto parts) has become a major concern for the CAW. There has been a rapid decline in the number of Canadians employed in the automobile industry: in 2007, there were 20,000 fewer jobs in the industry than there were in 2002. This is part of a larger trend away from production dominance by North American car makers. For the first time in history, the total number of cars made in the four BRIC economies—Brazil, Russia, India, and China—may exceed the number of cars made in North America. Those four countries will have the capacity to produce about 20 million cars in 2008, compared to the capacity of 17.4 million cars in North America. Large Canadian auto parts makers like Magna International and Linamar Corp. are starting to invest in plants overseas to get some of that business.

      Given the large number of job losses that have already occurred, it is not surprising that unionized auto workers are expressing increased concerns about job security. In 2007, unionized Chrysler workers in the U.S. rejected a contract proposed by their leadership because it didn't contain enough assurances about job security. A few weeks earlier, workers at General Motors ratified a new contract that gives them pay and benefits that are very similar to those of workers at non-unionized Toyota. The contract also allows GM to give workers a defined contribution pension plan instead of a defined benefit pension plan. This could mean savings of about $4 billion per year for GM and will make the company more competitive with Honda and Nissan. The UAW agreed to the new contract in return for assurances about job security.

      For Canadian car makers, two developments have been responsible for the decline in employment in the Canadian automobile industry. First, the dramatic rise in the Canadian dollar to near parity with the U.S. dollar means that Canada's former cost advantage in auto making has all but disappeared. In 2006, for example, labour costs at General Motors' U.S. manufacturing plants were about $73 per hour, and in Canada the costs were about $70 per hour. In fact, Canada is now one of the highest-cost production areas in the world for automobile manufacturing. The new labour contracts the Big Three (Ford, GM, and Chrysler) signed with the UAW have reduced their labour costs in the U.S. and they also want to reduce their Canadian labour costs. Ford is putting its Canadian manufacturing plants on notice that they must become more efficient and competitive.

      Second, labour costs at U.S. automakers like General Motors and Ford will decline sharply (perhaps to as little as $45 per hour) as the result of a new collective agreement with the United Auto Workers (UAW). The new agreement sets up a two-tiered wage system, where new hires will get paid about half of what longer-term employees earn. The agreement also allows U.S. car manufacturers to shift the cost of UAW retirees' medical costs off their balance sheets, and this further reduces their labour costs. Because these two aspects of the new agreement will reduce costs for U.S. manufacturers, they will have less incentive to set up manufacturing plants in Canada.

      In 2008, the CAW will bargain with Canadian auto makers in an attempt to reach a collective agreement that applies to Canadian workers. Hargrove says he will not agree to a two-tiered wage system like the one agreed to by the UAW in the U.S. He points out that while some of Canada's lower-cost advantages have indeed been lost due to the rise in the Canadian dollar, Canadian auto plants are still 25% more productive than those in the U.S. This is an advantage for Canada. He also says that the reduction in labour costs with the new UAW agreement in the U.S. will not be as much as everyone thinks. Sean McAlinden, the chief economist and vice-president of research at the Center for Automotive Research, thinks that Hargrove will have to find ways to help Canadian car makers reduce their costs. He thinks Hargrove will likely accept the two-tiered wage idea and try to call it something else.

      Movement toward pay reductions is gaining momentum. In early 2008, workers at a Magna auto parts plant in New York voted on a proposed agreement that would see wages cut by 25 percent, but with a promise that the plant would remain in operation. Management made it clear to the UAW that it couldn't continue to operate the plant unless workers' hourly wages were reduced. In Canada, management demands for wage cuts of CAW workers are being made as car manufacturers struggle with significant losses in market share by the Big Three. For example, PPG Industries Inc. wants a 25 percent wage cut and a two-tiered pay system at a glass making plant in Oshawa, Ontario, that supplies GM's big production complex there.

      Hargrove is also unhappy about government inaction regarding the problems in the Canadian auto industry. For example, he says that companies like Nissan, Hyundai, Toyota, Kia, and Honda have easy access to the Canadian market, but Canadian manufacturers do not have such easy access to markets in South Korea and Japan. As well, the rise in the Canadian dollar against the South Korean won is likely to boost the sales of South Korean car makers because it gives them more flexibility to cut prices of their cars. Hyundai and Kia Motors are both offering imported cars for under $10,000. Hargrove fears that Ford and GM may go bankrupt within a decade if something isn't done to reduce imports of foreign cars. Such bankruptcies would obviously mean massive job losses for Canadian workers who are in the CAW.

      Pay and job security are two issues that have historically been very important to unions when they represent their workers. But a more fundamental issue is the consistent failure of unions to organize auto workers at production plants run by companies like Honda, Nissan, and Toyota. Those companies have used a variety of tactics to avoid unionization of their workers. For example, when Honda announced that it was going to build a new assembly plant in Indiana, it also stipulated that only people living within a certain distance of the plant could apply. Since many of the laid-off unionized auto workers from other plants in Indiana didn't live in the stipulated area, they weren't allowed to apply. (Note: Companies cannot refuse to hire workers based on union affiliation, but they can do so based on geographical location.) Honda says its approach is not designed to prevent unionization of the plant. Instead, it wants workers to be close to the plant so they can get to work when the weather is bad in the winter. The union doesn't believe this explanation. Wages at the new plant will be $15-$18 per hour, which is noticeably lower than the $26 per hour that unionized workers are paid in other car manufacturing plants in the region.

      Foreign car manufacturers have been very successful at keeping unions out of their businesses. As of 2007, there were 33 foreign automobile, engine, and transmission plants in the U.S. Not one of them was unionized by the UAW, in spite of repeated attempts. In Canada, foreign car makers have also been successful at fending off organizing attempts by unions. For example, workers at Toyota have refused to join the CAW on several different occasions. In 2008, another union—the International Association of Machinists—tried to organize workers; but just hours before a vote was to be held, the union withdrew its certification application and the vote was cancelled. Labour leaders say they will keep trying to organize the workers.

      Union attempts to organize workers in other industries have also run into problems. The United Steelworkers, for example, recently tried to organize workers at Dofasco's Hamilton Harbour plant after the CEO sent an email to employees indicating that Dofasco would allow union organizers to come to the plant to talk to workers about joining the union. In spite of that, the union was unable to generate enough interest among workers, and in March 2008, the union gave up its organizing attempt.

      Questions for Discussion

      (Note: Students will not find specific answers to any of the following questions in the textbook. Rather, the questions are designed to get students thinking about the important issues that are identified in the material presented above.)

      1. In your own words, explain the problem facing Canadian car makers. What caused this problem to develop?
      2. Consider the following statement: "Competitive and cost pressures from non-union automobile makers will force the CAW to accept practices such as the two-tier wage system because Canadian car makers will be uncompetitive unless they lower their costs. Canadians who work in the automobile industry in the future are going to be paid a lot less than workers are now." Do you agree or disagree with the statement? Explain your reasoning.
      3. Why do you think workers who are given the chance to join a union often don't do so?
      4. There has been much debate over the years about the pros and cons of unions. Develop a list of the pros and cons of unionism.

      Sources: Nicolas Van Praet, "Loonie Gives Korean Autos an Advantage," Financial Post, April 9, 2008,; Nicolas Van Praet, "Auto Report Wake-Up Call For Canada," Financial Post, March 28, 2008,; "Steelworkers Drop Dofasco Union Bid," Financial Post, March 28, 2008,; Nicolas Van Praet, "Union Vote at Toyota Cancelled," Financial Post, March 20, 2008,; Greg Keenan, "CAW Leader Bucks Trend, Refuses Wage Cuts," Globe and Mail, February 21, 2008, pp. B1, B8; Omar El Akkad and Greg Keenan, "Hargrove 'Fearful' for Future of GM, Ford," Globe and Mail, February 13, 2008, pp. B1, B13; Greg Keenan, "Ford Fires Warning Shot at CAW," Globe and Mail, January 10, 2008, p. B7; Greg Keenan, "CAW Gears Up for Toughest Fight in 2008," Globe and Mail, December 31, 2007, p. B3; Greg Keenan, "CAW Members Approve Deal," Globe and Mail, December 8, 2007, p. B10; Nicolas Van Praet, "Buzz Hargrove has Some Very Big Problems," National Post, December 7, 2007, p. FP3; Jason Clemens and Keith Godin, "Unions' Democracy Talk is Hot Air," National Post, November 29, 2007, p. FP15; Wayne Fraser, Sid Ryan, Cec Makowski, Sharleen Stewart, Dave Ritchie, and Warrant Thomas, "The Magna Sell-Out," National Post, November 23, 2007,; Jeffrey McCracken, Josee Valcourt, and John D. Stoll, "UAW Shifts its Chrysler Strategy," Wall Street Journal, October 22, 2007, p. A3; Thomas Watson, "Car Trouble," Canadian Business, October 22, 2007,; John D. Stoll and Josee Valcourt, "Chrysler, UAW Reach Agreement," Wall Street Journal, October 11, 2007, p. A3; Jeffrey McCracken, "Deal to Help GM Cut Cost Gap with Rivals," Wall Street Journal, October 11, 2007, p. A3; Neal Boudette, "Honda and UAW Clash Over New Factory Jobs," Wall Street Journal, October 10, 2007, pp. A1, A19.

      Answers to Questions for Discussion

      1. In your own words, explain the problem facing Canadian car makers. What caused this problem to develop?

        The basic problem facing Canadian car makers is that they have become less competitive than they formerly were. Two environmental factors have worked together to cause this difficulty. The first factor is the rise in the value of the Canadian dollar. For many years, Canadian car makers had a cost advantage because the Canadian dollar was very low in value compared to the U.S. dollar. (The low Canadian dollar benefited all exporters, not just car makers.) When the dollar rose sharply in 2007, the Canadian cost advantage disappeared within a few months. The cost of making cars in Canada, therefore, increased in terms of international trade, and this made Canadian car makers less competitive. The second factor is the new contract the UAW signed with General Motors in the U.S. That contract will reduce the labour costs associated with producing cars in the U.S., so companies like Ford, Chrysler, and GM now have less incentive to produce cars in Canada. These lower labour costs will exist irrespective of the value of the Canadian dollar, although a big enough drop in the Canadian dollar would once again create some international trade advantages for Canadian car makers.

      2. Consider the following statement: "Competitive and cost pressures from non-union automobile makers will force the CAW to accept practices such as the two-tier wage system because Canadian car makers will be uncompetitive unless they lower their costs. Canadians who work in the automobile industry in the future are going to be paid a lot less than workers are now." Do you agree or disagree with the statement? Explain your reasoning.

        There are many arguments students can make if they agree with the statement:

        • In the globalized manufacturing of automobiles, there is ruthless price competition, and consumers have shown that they are very price conscious. This means that companies simply must be price-competitive in their product offerings. To be price-competitive, they must reduce costs wherever possible, and that includes labour costs. Buzz Hargrove obviously does not want to accept the two-tier wage system for the CAW, but he will have no choice. If labour costs in Canadian automobile manufacturing are too high, companies will move their production work elsewhere, and all production jobs that currently exist in Canada will be lost. This is the painful reality that all manufacturers—not just automobile manufacturers—face in a competitive global market.
        • Consumers obviously respond to lower prices, and if foreign car makers can keep labour costs lower by keeping unions out, they will be able to offer lower prices to consumers. This will make it difficult for higher-cost car makers to compete in the marketplace.
        • The two-tier wage system is already becoming evident in many jobs outside the automobile business. Workers who do not have specialized training or expertise typically find themselves working in jobs that pay only $8-$12 per hour, while workers who do have specialized training and expertise earn far more. Years ago, people with relatively little education or specialized skills could make a very good wage (for example, in automobile assembly), but that is rapidly changing because so much production work is being outsourced overseas to low-wage areas.

        Students who disagree with the statement may make the following arguments:

        • The problem currently facing the CAW is a temporary one that has largely been caused by the rise in the value of the Canadian dollar. The dollar has fluctuated a lot over the past 50 years and will likely continue to do so. Once it goes down again (say, to $0.80), Canadian car makers will once again be competitive in the global market.
        • The export market is not the only market that Canadian car makers have available to them. As a major consumer market, there is a lot of domestic demand for cars in Canada, and Canadian manufacturers can do a good job of supplying that market.
        • The decline in labour costs in the U.S. as a result of the new UAW agreement will not make as much difference as everyone thinks. It is unlikely that U.S. car makers can actually reduce their labour costs from $70 to $45 per hour. For every dollar that they fall short of reaching that goal, Canadian car makers become more competitive.
        • The CAW can develop a new collective agreement with Canadian car makers that will involve concessions in other areas of labour costs, and they will, therefore, not be required to accept the two-tier wage system.
      3. Why do you think workers who are given the chance to join a union often don't do so?

        There are both financial and non-financial reasons. On the financial side, some workers are not convinced that the dues they pay to the union result in any positive outcomes for workers. Also, given events that have occurred during the past few years, increasing numbers of workers are coming to the realization that while a union may be able to get workers higher salaries in the short run, in the long run high salaries make a company vulnerable to the actions of low-cost competitors (this is precisely what has happened to unionized companies in the automobile business). The large amount of publicity about the outsourcing of work to low-wage foreign countries has not gone unnoticed by workers. They see that job security in high-wage areas like Canada is threatened by outsourcing. Another reason that workers decide not to join a union is management action which is designed to convince them that they don't need to join a union. Sometimes this action intimidates workers into not joining (for example, when management says it will have to close the plant if the workers vote to join a union because the company will not be able to absorb the new, higher labour costs that will result).

        On the non-financial side, some workers are simply opposed in principle to the idea of joining a union. These individuals are typically individualistic and entrepreneurial, and they are confident about their ability to negotiate for themselves. They do not want to be represented by someone who bargains on their behalf. Some workers are opposed to the idea of joining a union because they know they will be pressured to go on strike if the union decides to strike. If a strike is called, great peer pressure is put on all members of the union to stop working, but some members don't want to go on strike because they feel they can't afford to, or because they are opposed in principle to going on strike. Another non-financial reason is the concern by many workers that unions protect non-productive workers. This reduces a company's overall productivity and its competitiveness, which in turn, reduces job security. Yet another concern is job inflexibility. Union work rules in some companies prevent workers from doing a variety of jobs. For example, at one unionized automobile plant, the contract says that three workers are needed to change fuses in industrial robots (a machinist to open the robot, an electrician to change the fuse, and a supervisor to oversee the process). Another reason that workers may not want to join a union is company activity that is designed to create an employee-friendly work environment. The more positive the work environment is, the less likely it is that workers will feel the need to join a union.

        Overall, these reasons for not joining a union seem to be fairly common since less than one-third of workers belong to a union in Canada (the proportion is even lower in the U.S.).

      4. There has been much debate over the years about the pros and cons of unions. Develop a list of the pros and cons of unionism.

        Some of the classic arguments in favour of unions are as follows:

        • Unions protect workers from arbitrary and unfair actions by managers.
        • In a democratic society, workers have a right to join an organization like a union.
        • Individually, workers have too little power in comparison to management; unions create a better balance of power by creating a collective of workers who can state their demands.
        • Unions keep management honest; if unions don't exist, management will quickly take advantage of workers.
        • It would be unfair to let some workers opt out of the union because they would then benefit from the union's work even though they didn't pay any union dues.
        • If workers feel strongly about not joining a union, they should work in a company that has no union; it should not be difficult to find such a company, since more than two-thirds of Canadian workers do not belong to unions.

        Some of the classic arguments opposing unions are as follows:

        • Workers shouldn't be forced to join a union in order to hold a job at a company. The way the laws in Canada are set up, if a majority of workers vote to join a union, the minority are also forced into paying union dues even if they don't want to.
        • Management is required to deduct union dues from workers' pay and then forward that money to the union, which places an unreasonable burden on management. Unions should be required to collect their own dues.
        • Unions have too much power; for example, they can shut down an entire industry by going on strike. This is particularly unacceptable in critical industries like health care, fire, and police protection.
        • Unions are no longer necessary because management is now more "enlightened" than it was 100 years ago and workers are treated much better than they used to be.
        • Many new government programs are now in place that protect workers (social insurance, minimum wage laws, unemployment insurance, job safety laws, etc.).
        • In the new globalized economy, companies must emphasize flexibility in operations in order to stay competitive and to preserve jobs. Unions reduce management flexibility and thereby increase the chance that the company will not remain economically viable; if this happens, jobs are lost.