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Companies Will Learn to Love Unions

Organized labor provides real advantages for employers, especially in a tight labor market like the U.S. is entering.

Unions get a bad rap. But they serve a purpose.

Photographer: Joe Raedle/Getty Images

With a labor shortage unlikely to go away any time soon, companies should consider embracing organizations they've shunned -- labor unions -- to guarantee themselves the workers they'll need.

Companies have been complaining about a labor shortage for a while, to which the response from some, like Minneapolis Fed President Neel Kashkari, has been "Have you tried raising wages?" But it turns out that limits on the labor supply may in fact be a hard constraint.

The Wall Street Journal reported last week that the shipping industry is so bottlenecked that freight companies are telling firms to either pay up or get used to delays. Lancaster Colony Corporation, a food products company, reported missing earnings last week in part because of insufficient freight capacity at the end of the year. A large Bay Area homebuilder canceled its plans to rebuild homes in fire-ravaged Santa Rosa because it couldn't find enough construction labor.

The private sector spent decades getting as lean as possible, outsourcing core functions like back-office support, and embraced a "just in time" inventory model, and we're finally seeing the downsides of the new framework. If the labor market tightens enough and you're forced to hire more workers in a short period of time, there might just not be any available at a price you're able to pay. It's reminiscent of what happened to some borrowers in the lead-up to the financial crisis, when short-term financing evaporated overnight. Current conditions are going to blow up some businesses in 2018.

This is where unions come into play. At this point, views on labor unions fall neatly along party lines, with Democrats thinking they're the main way to ensure workers get fair treatment and Republicans thinking they're counterproductive and corrupt. But labor unions have economic utility by serving the needs both of employers and workers. For workers, they're to ensure higher pay, benefits and employment predictability. And for employers, they're to ensure an adequate supply of labor and cost certainty.

The weakening of labor unions worked out for employers over the past several decades, as workers lost bargaining power and wage growth stagnated. So companies got used to a plentiful supply of on-demand labor at low wages. But that's over.

One possible surprise in the economy in 2018 would be if firms with union labor outperformed those without it. From an employer's perspective, labor unions might have their costs -- perhaps higher short-term pay and benefits -- but in a tight labor market you're guaranteed an adequate labor supply at agreed-upon wage rates, which short-handed firms will be scrambling to find and paying top dollar to get.

This isn't to say labor unions make sense for all industries. In fast-changing, dynamic industries like the technology sector, labor unions may not be compatible with the flexibility that both employers and workers want. But more industries should be thinking about them than currently are.

Deciding whether to go with unionized labor is a bit like deciding to go with fixed or floating-rate debt. If firms think interest rates will stay low and credit will be readily available, then going with short-term or floating-rate debt makes sense. But if interest rates are likely to rise or credit availability will become more volatile, then longer-term, fixed-rate debt makes more sense.

That's the framework employers should be thinking about when it comes to labor unions. If they take such a rational approach, more industries will embrace them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Conor Sen at csen9@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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