Companies shift to contractors simply to avoid unionization?

by philg

“The End of Employees” (WSJ, February 2, 2017) is an article that my Facebook friends continue to express outrage regarding.

No one in the airline industry comes close to Virgin America Inc. on a measurement of efficiency called revenue per employee. That’s because baggage delivery, heavy maintenance, reservations, catering and many other jobs aren’t done by employees. Virgin America uses contractors.

Never before have American companies tried so hard to employ so few people. The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry.

The contractor model is so prevalent that Google parent Alphabet Inc., ranked by Fortune magazine as the best place to work for seven of the past 10 years, has roughly equal numbers of outsourced workers and full-time employees, …

The shift is radically altering what it means to be a company and a worker. More flexibility for companies to shrink the size of their employee base, pay and benefits means less job security for workers. Rising from the mailroom to a corner office is harder now that outsourced jobs are no longer part of the workforce from which star performers are promoted.

I’m wondering if the main explanation isn’t a lot simpler than the WSJ suggests. They lead with a story about an airline. In “Unions and Airlines” I explained how airlines are sitting ducks for labor unions to extract all of the profits. Major airlines nearly always contract out regional flying because when one regional’s labor costs rise it can be dropped in favor of a startup regional airline that, by definition, has 100 percent of pilots and flight attendants on first-year pay (and might also be non-union).

Contracting can’t be a way to escape the costs of U.S. labor regulations, health insurance, etc., because the contractor will have to pay these costs. However, if 50 percent of a company’s workers are contractors then by definition at most 50 percent of a company’s workforce can become unionized (if a contractor’s costs rise due to unionization, they can be replaced by a non-union or startup contractor, as happens with regional airlines contracting to the majors).

12 thoughts on “Companies shift to contractors simply to avoid unionization?”

  2. To what extent H-1B and similar programs are about unionization or professionalization of IT workers, a la the AMA or Bar Association is another interesting question. Bringing in a bunch of foreigners to break up worker solidarity is one of the oldest tricks in the book. The west coast tech titans and the VC “startup” industry are prime targets for white collar unionization.

  3. My son was briefly some kind of (paid) intern at Microsoft a few years ago and in order to distance themselves as far as possible he was employed by a contractor and he had to sign a document with that contractor stating that he was an independent contractor of that contractor and not an employee of the contractor let alone Microsoft. Then one day he came into his office and found out that they had fired everyone on his project and that was that.

  4. Companies shift to contractors simply to avoid unionization?

    Aside from the public-sector, unions died out 30 years ago. Companies use contractors to lower personnel costs and gain flexibility.

  5. I think the Smartest Woman on the Internet is right (unsuprisingly?). You can fire a contractor far easier than an employee – if there on a fixed term, just don’t renew; tell the contracting company to replace them; terminate the work order under which the contractor was employed; terminate the agreement with the contracting company; etc.

  6. This is exactly what I was thinking when I read an article about warehouse workers unionizing at B&H! I though: “if you would be smart, you would contract your warehouse workers from 5 different subsidiaries, and then they can unionize all they want!”

  8. A similar article from Eduardo Porter at the New York Times: Shaky Jobs, Sluggish Wages. Notes that outsourcing allows employers to pay lower wages:

    A 2008 study by Arindrajit Dube of the University of Massachusetts, Amherst, and Ethan Kaplan, then at the Institute for International Economic Studies at Stockholm University, found that outsourcing imposed a wage penalty of up to 7 percent for janitors and up to 24 percent for security guards.

    The Government Accountability Office of Congress concluded that contingent workers in the education field — substitute teachers, adjuncts and the like — earn almost 14 percent less per hour. In retailing they earn 9.4 percent less. Contingent workers across the board are less likely to have health insurance. One-third live in families making less than $20,000 a year. That is three times the share of workers employed in standard full-time jobs.

    Given the current blue-collar anger over inequality and insecurity, this situation seems unsustainable. Whether it’s outsourcing, automation, or globalization, companies are cutting costs and boosting profits (which go to their shareholders and executives), while workers are facing lower wages and greater insecurity.

    Another illustration, profiling a machinist at Rexnord in Indianapolis: The last bitter days of Rexnord in Indianapolis.

    The Feltners still haven’t fully recovered from John’s last layoff — from diesel motor manufacturer Navistar in 2008.

    That was the best job of his life, Feltner said, and some of the best times of it.

    He was making $30 an hour. The family had a two-story house in a suburban neighborhood on the east side — “one of the nicest houses on the block,” Feltner said. He had an old truck, but took pride in his custom-built motorcycle. His wife had a new SUV. They had cookouts with neighbors in their big backyard. The kids roamed from yard to yard playing.

    Then the ax fell at Navistar. It was unexpected and fell heavy on the Feltners. They got behind on their house payments and soon went to foreclosure. They couldn’t make their car payments. They were bankrupt.

    “We lost everything we had,” Feltner said.

    As Feltner began looking for work, the family began moving through a series of rental homes, some better than others.

    He took a job with an insurance company — as a janitor. He went on to manage their fleet of vehicles, ran purchasing in the mailroom and moved into the loss control department. Eventually, he won a promotion and a transfer — to Texas. The Feltners pulled their kids out of school and moved just outside of Dallas. They knew no one, and Feltner found himself on the road four days a week, traveling a territory that covered six states. “It was tough,” Nina Feltner said. “That was really hard.”

    And then the job in Texas dried up. In preparation for being sold, the company began to downsize. And John Feltner took a severance. He began trying for a position back in Indiana — at Rexnord — and even drove 14 hours for an interview only to be turned down in five minutes. Down to their last $200, the Feltners moved back to Indiana — job or no job. Not long after they did, Rexnord called back. This time they had a job. And at $25 an hour, the Feltners looked to be back in the game.

    Now he’s facing unemployment again, at 47.

    I don’t know what the answer is, but the current situation (increasing inequality and insecurity for everyone except the people at the top) seems explosive. I can totally understand why so many people voted for Trump.

    I think there’s two broad approaches. One is social norms. Prior to 1980 and executive “pay for performance” (huge bonuses linked to the stock market, basically), CEO pay was a lot lower. In Japan, employers make a much greater effort to keep workers on. Trump has been bullying individual companies who are opening factories abroad.

    Another approach would be to go for maximum efficiency, but try to redistribute the profits through more progressive taxation and public spending. This is basically the approach in Canada.

    And a third approach, of course, is to continue on the current path, while blaming American workers for not being willing to accept even lower wages.

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