Free Riders Face a Rocky Road

As a salaried employee of a major corporation, I’ve been taunted by this argument a number of times. It’s essentially the “free rider” argument. The point of this argument is that a union obtains pay increases and benefit improvements for everybody in the organization, and not just those covered in the bargaining unit.

In fairness, I would have to admit that this is true. The items covered in my employer’s union contracts have routinely been distributed to nonunion employees almost immediately after the signing of union contracts. Over the years, we’ve received cost-of-living adjustments, pension improvements, salary increases, extra holidays, and even dental and eye care programs. These changes were obviously related to similar changes in union agreements, so it would be ridiculous and false to insist that there was no tie-in.

I sometimes worried about the way spiraling costs were hurting our business. And it bothered me in late 1974 when the union negotiated hefty wage and benefit increases even while hundreds of employees were laid off. Like other free riders, however, I went along with the process, and accepted the new benefits as an additional “right.” As far as I know, not a single free rider protested because of a system that enabled people to demand and get wage increases even when the market for their services was sliding.

A Changed Climate

Today the climate has changed dramatically—changed both for union members and for other employees who have gone along for the ride. Unemployment has been soaring, from an 8 percent rate in September, 1981 to a 10.8 percent rate only 14 months later. Basic industries such as autos, steel and construction are in deep trouble, and this is causing ripple effects of distress throughout the nation. White-collar workers, the so-called free riders, have been caught in this storm along with unionized employees. In the September 1981 to September 1982 period, unemployment among white-collar workers rose from 4.1 percent to 4.8 percent, and the climb apparently is continuing.

In this deteriorating economic climate, the unions have become a favorite target. They are blamed for shoddy work practices which have made American goods less competitive in the market, they are blamed for refusing to make wage concessions which would lower manufac turing costs, and they are blamed for supporting legislation which raises taxes or handcuffs business.

The unions deserve this critical attention, and it’s probably causing some members to question whether unions have served their best interests. But let’s not believe that we can dispose of our problem simply by putting a union label on it. We free riders also deserve some of the blame, if only because we shrugged at ideas and practices which helped create the serious problems we now face. If we’re traveling on a rocky road today, it’s because we once thought it was a smooth highway into the future.

Both union members and free riders have made certain assumptions, or held certain beliefs, which are turning out to be liabilities for the nation as a whole. Here are three of these ideas which need re-examination and overhauling:

1) That compulsory union membership serves the interests of all workers;

2) That wage and other cost increases can be “passed through” indefinitely in the form of higher prices;

3) That companies, with their seemingly large resources, are the basic providers of jobs and security.

None of these ideas stands up very well when it is thoroughly explored and tested. Yet both union members and other company employees in the United States have acted as if these three beliefs were true. As a result of these false beliefs, there has been a tendency to ignore market signals which clearly were pointing to trouble ahead.

Here, in my opinion, are some of the things we free riders should have given more consideration to, in the years when we thought we were traveling on a smooth highway.

Compulsory Union Membership

For one thing, we should have worried about the long-term and general effects of compulsory union membership. The public has fretted about the “greed” of the large unions and, occasionally, the weakness of management in coping with union demands. In fact, however, the system has been tilted politically to give unions unusual powers in the bargaining process. It is useless to blame unions for abusing this power. It is pointless to insist that management should have shown more firmness in bargaining sessions. Given the realities of compulsory union membership, we have come out about where we should have expected to be.

The public seems to be ambivalent about unions. On the one hand, there is a belief that unions were once very necessary and performed a useful service in bringing general improvements to working conditions and in raising pay levels. But now unions are seen as “having too much power” and there’s a belief that they ought to be reined in or made to behave in a more responsible manner. There is amazement at some current union actions, such as the strike by Chrysler’s Canadian workers at a time when the company’s future is very shaky. Why do unions, or their members, sometimes behave in ways that seem to go against the public interest and may also destroy their own jobs? (We free riders are especially alarmed when unions launch strikes which threaten our jobs as well as the jobs of striking workers!)

But by authorizing compulsory union membership, the public (through its elected representatives) also authorized what it now deplores as abuses of power. Without compulsory membership, there are checks and balances which would serve as natural restraints or adjustments in relations between companies and their work forces. If there is no compulsion, for example, some members could refuse to pay union dues or they could resign from the union if they disagreed with its actions. Other workers could be brought in to replace the workers who had struck. And there could also be vigorous prosecution when the union uses violence to enforce its demands, as unions have done in hundreds of cases.

Admittedly, most of these actions to restrain unions have been discredited or held up to ridicule. But that’s only because unions were so successful, in the past, in winning support for practices which would frighten us if everybody adopted them. The nonunion, salaried employees of a company do not have the same “right to strike” that is conferred on union organizations. Yet many of those salaried employees—the free riders—think it is reasonable and proper that unionized employees should have this privilege.

I’ve also talked with many salaried, nonunion employees who do not understand the implications of the unions’ right to strike. They feel that a strike is just the normal use of one’s right to quit a job. But if striking workers were merely quitting their jobs, most companies would respond simply by hiring new workers and starting up again. The real power of the strike is the unions’ power to keep companies from exercising this alternative. Unions do this by using either the law or violence to enforce their strikes.

Over the years, unions have used the strike weapon to bludgeon most of the major U.S. industries into compliance with union demands. We free riders, as well as unionized employees, have been included in the process. And many of us, while voicing disapproval of high-handed union actions at the bargaining table, may have secretly enjoyed what was going on. “I hope they get what they’re going after,” one of my fellow employees told me, just after the union’s demands became known. “The company will have to give us the same benefits!”

But while this was going on, few people paused to ask what the cumulative effects of these periodic contract agreements might be. We can now look back and realize that excessive costs have destroyed one market after another for U.S. producers. We now feel that unions should have shown more “social responsibility” or foresight. But most of us probably believed that increases in wages and benefits could always be “passed through” in increased costs.

The Myth of “Passing Through”

We free riders got into trouble because we believed, along with the union, that large industrial companies could always “pass through” increased costs to the customer. This was widely believed about the U.S. automobile industry, and some critics even felt that bargaining negotiations were simply pro forma sessions which unions and management conducted at the customer’s expense. This was believed possible because U.S. auto manufacturers had little strong competition in American markets until the 1960s, when both European and Japanese producers began to move into the U.S. market in force.

In fact, however, there is almost no way increased costs can be “passed through” indefinitely, or even for the short term, without harming one’s position in the market. Even when U.S. manufacturers dominated the market, increases in automobile production costs resulted in higher prices which forced some buyers to abandon or postpone their purchases. Or, if they purchased automobiles at higher prices, they passed up the purchase of something else on their lists of preferences. In any case, higher costs and prices always led to reduced sales and production for somebody, although it happened so slowly and was spread over such a large market that few people noticed it or could trace the process.

It’s possible that economics professors and antibusiness writers helped perpetuate belief in this myth. Major U.S. industries, they argued, were “oligopolies” which gave companies the power to adjust prices markedly without paying any penalty in reduced sales. Business leaders and marketing executives who said this wasn’t true were merely being “self-serving” in order to maximize their own profits and take a larger share of the pie. Meanwhile, by demanding a larger share of the pie for themselves, unions were performing a useful social function.

Free riders, also, believed that costs could be “passed through” in a painless manner, and few of us realized what the cumulative effects of this false belief would be. U.S. manufacturers held a dominant position in world markets until about 1965, and then a tremendous slippage started to occur because of price competition. In market after market, we had become the high-cost producers, and jobs were lost in steel, in autos, in textiles, in shoes—in virtually every manufacturing industry.

When plants were closed, free riders lost their jobs along with union members. There were rising complaints in northern industrial states about losing jobs to “cheap labor in the South” or “cheap foreign labor” in Taiwan, Mexico or Japan. But the competition from low-cost producers elsewhere was not the real cause of our problem, although it did help dramatize the cost inefficiencies of many American industries. Even more dramatically, it proved that even the largest manufacturers and so-called “oligopolies” do not have much power when it comes to “passing through” cost increases.

Now, it is true that mature industrial states like Ohio and Michigan have a tendency to become high-cost areas over long periods of time. It was inevitable that other areas in the United States and in foreign countries would someday challenge us in our markets. But we made it much easier for them to succeed in this challenge when we accepted the idea that major U.S. industries had the power to bypass price competition.

Who Provides the Job?

A third false belief we free riders accepted is that companies, with their seemingly large resources, are the basic providers of jobs and security. This seemed to be true because many people, both union and nonunion, spend their lives with strong companies which always offered good pay and benefits. In these arrangements, the company is viewed as the employer and the jobs are a form of property.

We are now learning that no company has a fixed number of jobs which it can offer to any group of employees, union or nonunion. Employees may like to think that they have lifetime employment, but this is a false belief because the company itself is mortal and cannot really control the length of its own life-span. Good management and brilliant planning may make one company more successful than another, but every company is subject to market changes and unpredictable events which can wipe it out almost overnight.

We have been getting a lesson in this reality. Who would have believed, some years ago, that great industrial firms like Chrysler Corporation and International Harvester would move to the edge of bankruptcy, dislodging thousands of people who once thought they had lifetime employment with these companies? Who would have believed that General Motors Corporation would have more than 150,000 people on indefinite lay-off by 1982 or that more than 500,000 jobs in auto manufacturing and auto-related industries would be lost with little likelihood of restoration? All of this has happened, and the process has been repeated in most major industries.

The Customer Is in Charge

What this should teach us is that no company is really the basic provider of jobs and security. Every company, no matter how vast its resources, is really performing a brokering service between customers and the resources needed to supply customers with products and services. Jobs come into existence when there is a market need for them, and pass out of existence when the market need for them disappears. Job levels also can be reduced when companies change the combination of resources needed; for example, when a highly automated plant replaces a less efficient one that required a larger work force.

In the current recession, some business analysts are telling us that millions of jobs have disappeared and might never come back again. What really happened is that customers who formerly provided the jobs have changed their preferences for various reasons. And just as companies do not have the power or willingness to provide lifetime employment, neither can customers continue to schedule their purchases so as not to disrupt our personal employment plans. This may bring anguish, not only to employees of a company, but also to shareholders, plant communities, suppliers and many others who depend on the company. It is a fact of life, however, that the customer is the real provider of the job, and we ignore that fact at our own peril.

There Is No Such Thing as a Free Ride

Perhaps some of our friends who constantly tell us there is no “free lunch” should also say that there is no such thing as a “free ride.” We do live in a very complex society in which many forces are delicately balanced and related to one another. Almost everything we do or think is bound to affect somebody in some way. More to the point, everything we do or think in our commercial activities will eventually affect our pocketbooks in some way.

As a free rider, I now think it was wrong to pretend that I was a spectator or innocent bystander during the years when our own basic industries were being sapped of the vitality and cost- efficiency which once brought them leadership in world markets. I should have realized, more keenly than I did, that false beliefs and unsound practices would lead to trouble for all of us.

And while I have been critical of unions in this article, I do not really blame them for the troubles we are in, as some of my fellow free riders do. Industrial unions are simply. forms of the pressure groups we have throughout society. Many of the people who criticize industrial unions belong to pressure groups of their own which are seeking special legislated advantage at the expense of the rest of us.

The Real Message

What our troubles should be telling us is that we ought to look at ideas and practices in the early stages, and do something about them before they’ve run their course and produced so much damage. We should really be studying trends and ideas by asking where each is likely to lead.

Take, for example, the time when my neighbor taunted me about receiving the extra holiday which came as a result of the new union contract.

If I had been thinking with any clarity, I might have replied thusly: “Yes, it is always nice to have a day off. But the union did not really ‘give’ me this day off. It had to come out of our business in some way, and what it really means is that the company has been forced to pay me for not working. But the company is really only a broker between customers and resources, so the truth is that our customers had to pay me for not working. Today’s vacation is really a small amount and it’s not likely to affect their decision to use our products in the future. But I am concerned because we’ve been piling lots of things onto the customers. I hope the customers do not eventually rebel and put the union and free riders like myself out of our jobs.”

But that would have been too much of a statement for a warm holiday morning when everything seemed to be going so well. And I’m also afraid my neighbor would have replied with a popular two-syllable expletive. In his view, I was a free rider, and that was that.

He was right—but he should have noted that almost everybody in the country has to go along with whatever ride is being offered.

That’s why we should all pay more attention than we do to the driving. We now know that the road can become just as rocky for free riders as it does for the people behind the wheel.