How Unions Created the Gig Economy

Over the years, we've often explained how labor unions kill jobs by driving employers bankrupt or forcing them to move jobs out of the country.  Of course, there's a limit to the harm unions can do in that manner because a good many jobs simply can't be shipped overseas - or is there?

The Wall Street Journal recently showed that in addition to destroying jobs, unions are changing the very nature of employment by impelling businesses who can't move away to have fewer and fewer employees:

Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers.

There was a time when a large, complex business like General Motors hired its own employees to do pretty much everything that had to be done.  Automobile designers and plant workers were GM employees, of course, but so were gate guards, janitors, gardeners, and the people who plowed the parking lots.

Modern companies, instead of hiring janitors or landscapers, now contract with independent companies who bring in people as needed.  At Alphabet, the parent company of Google, the number of contract employees who wear red badges is about equal to the number of permanent employees who have white badges.  If a contract employee does a super job, it's possible to be taken on as a permanent Google employee, but all such changes must be approved personally by Google co-founder Larry Page.  This doesn't happen often.

Google does this because they want to be able to shrink employment rapidly if a project doesn't work out.  They like to offer long-term employment security when they hire actual employees, but they can't do that and also cut head count to let a project die the moment it's clear that it won't make money.

Giving contractors less job security gives them a strong interest in making the project succeed, of course, which is another reason to go that route.  Having employees know that their next paycheck depends on having the demo work spectacularly is a wonderful motivator which large companies lose once employment becomes more secure.

The same non-employee process happens with lower skilled jobs:

The men and women who unload shipping containers at Wal-Mart warehouses are provided by trucking company Schneider National Inc.'s logistics operation, which in turn subcontracts with temporary-staffing agencies. Pfizer Inc. used contractors to perform the majority of its clinical drug trials last year.

The Journal didn't state the obvious conclusion, but they make it clear what's helping drive this redefinition of employment:

The 200 UPS employees can do work for five factories that 150 Pratt employees used to do for two. Pratt's employees were unionized, but UPS's aren't. The union representing Pratt workers objected to the move.  [emphasis added]

Virgin America airline, a relatively young company, has designed its entire business model around carrying employee outsourcing a lot further than other airlines.

... baggage delivery, heavy maintenance, reservations, catering and many other jobs aren't done by employees. Virgin America uses contractors.

"We will outsource every job that we can that is not customer-facing," [the CEO said]

The people you see in the store are just about always real employees because Wal-Mart, like Virgin America, wants to have tight control of customer-facing employees.  However, all the work that's done behind the scenes can be contracted out.

Consider an important but relatively low-skill function such as baggage handling.  If the handlers are unionized airline employees, there's relatively little the airline can do to cut costs other than going bankrupt and discarding all the union contracts.  They have to keep unneeded handlers on the payroll as traffic fluctuates or they add automation.  They may not even be able to fire incompetent or lazy baggage handlers who treat your luggage like frisbees.

If the airline contracts the task out, however, they're protected.  If the contractor unionizes and costs go up too much, the airline awards the contract to a competing firm when it's time to renew; the unionized workers get laid off because their actual employer has no work for them anymore, having lost the contract they were employed to fulfill.  If the subcontracted baggage handlers mistreat the bags too much, the airline can simply state that certain individuals are no longer required or pull the entire contract for cause.

None of this is possible with direct employees who are unionized.  It's hard to imagine Pratt and Whitney achieving the savings given by "200 UPS employees can do work for five factories that 150 Pratt employees used to do for two" with a directly-employed and unionized workforce.

Our "Win a Raise, Lose Your Job" which explained how winning a raise via union action, as opposed to earning one through improved productivity, often puts the employer out of business over time, as well as putting the former employees out on the street.  Employees don't like hitting the street soon after getting a raise, of course, but all too many of them seem unable to learn the lesson.

Businesses have, though, and have discovered an alternative: Instead of going out of business, they can protect themselves by outsourcing.  The fact that this leads to unsteady, non-career, gig-economy jobs for anyone not blessed with special talents or skills is an unfortunate and regrettable side-effect, but as long as hiring large numbers of employees carries the ever-present risk of bringing in a greedy union that can never, ever be gotten rid of, companies will do whatever it takes to avoid that fate.

What of the old traditional businesses who were unionized or over-regulated long ago and can't get out of it?  We need look no further than at city taxi companies, whose customers fled in droves the instant non-unionized, innovative gig-economy companies like Uber and Lyft appeared.

The artificially inflated value of taxicab medallions has plummeted, and it's easy to imagine a world in which traditional taxis exist only in period films.  If they cannot discover a way to add value instead of leeching it, the same will be true of private-sector unions themselves, but as they die, their greed and intransigence may also kill the traditional idea of a regular, steady, 40-hour job for people without highly-valued college degrees - and, as all too many millennials have discovered their chagrin, often for those with degrees as well.