Using Unions As Weapons

UPS and FedEx face off in Congress instead of the marketplace.

Imagine two competing pizza delivery companies that are identical in every way except their delivery methods. Pizza Company A delivers its pizza by car and Pizza Company B delivers its pizza by bike.

Now imagine that the government has completely different labor laws for pizza parlors with cars and pizza parlors with bicycles. The result is much larger labor costs for Company B than Company A. Is that fair? Should the government care?

A similar situation underlies a vicious fight between United Parcel Service (UPS) and its main private competitor in the delivery business, FedEx, over archaic labor rules that classify the companies based on their favored forms of transportation. Because 85 percent of FedEx deliveries go by air and 85 percent of UPS deliveries go by truck, the two companies are obliged to obey different labor laws. 

FedEx Express, the company's air delivery service, operates under the Railway Labor Act (RLA), instituted in 1926 to arbitrate labor disputes in industries (including, by 1936, airlines) that are deemed vital to interstate commerce. Under this law, in order to be recognized, a union must receive a majority of votes from all a company's employees, rather than merely a majority of those who choose to vote. That makes it much more difficult for labor to organize. As a result, FedEx Express, and therefore FedEx, have been mostly union-free for decades.

 UPS, by contrast, operates under the 1935 National Labor Relations Act (NLRA, commonly known as the Wagner Act). This Depression-era law allows unionization at each individualoffice of a national company, thereby significantly lowering the barriers to labor organizing. As a result, UPS is one of the largest unionized companies in the country. (Like UPS, the FedEx Ground and FedEx Freight divisions of FedEx are covered by the NLRA.)

This legal distinction has had a significant impact on the two competitors' labor costs. Average compensation and benefit cost per employee at UPS is more than double that at FedEx—$74,413 vs. $29,310. (See table.)

By now, UPS has had enough of the extra costs labor unions impose on its business. To tackle the problem, Big Brown teamed up with the very people responsible for the costs: the Teamsters. Working together, they've lobbied the Democratic majority in Congress to transfer approximately 100,000 of FedEx's employees—basically the ground pickup and delivery operations of FedEx Express—to fall under the Wagner Act. The change would make it easier for these employees to unionize, which would raise FedEx's labor costs.

House Transportation and Infrastructure Committee Chairman Jim Oberstar (D-Minn.) inserted language changing FedEx's labor status into a reauthorization bill for the Federal Aviation Administration. The legislation passed the House by a vote of 277 to 136 in May, over FedEx's objections. The measure is now awaiting passage in the Senate.

Committee members who supported the amendment claimed they wanted to create a level playing field between the two companies. "It's an issue of fundamental fairness," Rep. Candice Miller (R-Mich.) told Roll Call. "The workers, and most importantly consumers, would be better served."

It's interesting that these lawmakers think leveling the playing field needs to take the form of giving more, not less, power to unions. Where were they back when UPS was trying to be reclassified under the Railway Labor Act?

In 1993 UPS argued to the NRL Board that all of its activities, "including ground operations," should be subject to the RLA "because the ground operations are part of the air service." Whatever you think of the Railway Labor Act, the law was intended to protect the arteries of commerce and to ensure that any bargaining agreement for employees be the same throughout the entire company, so that no local unit could paralyze the entire company. It was designed for companies that primarily use rail and air in conducting or facilitating interstate commerce. In that sense, FedEx, with its integrated system, probably has a stronger claim to be an RLA company than UPS does. Yet according to Washington Post columnist George Will, "FedEx supported UPS's efforts, even though the vast majority of UPS parcels never go on an airplane, whereas FedEx's trucking operations exist to feed its air fleet and distribute what it carries." UPS's demand was denied, opening the path to today's battle.

Rather than continue pushing for reclassification, or just competing fair and square under current law, UPS is using the federal government to inflict damage on its competition. While this maneuver is hardly commendable, it is predictable. In their 2004 book Saving Capitalism From the Capitalists, economists Raghuram G. Rajan and Luigi Zingales of the Chicago Booth School of Business brilliantly describe this Washingtoncentric way of competing. "Capitalism's biggest political enemies are not the firebrand trade unionists spewing vitriol against the system," they warn, "but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action."

Yet unions do play an important part in this comedy. Teamsters gave $2.4 million to Democrats during the 2008 federal election season and are now collecting the rewards. While it's tempting to see this as the last gasp of sputtering private-sector unionism—whose share of the U.S. private work force, according the Bureau of Labor Statistics, has plummeted from 36 percent in 1953 to 7 percent today—that would, alas, be incorrect.

For the first time in well over a decade, unions have both a strong ally in the White House and a Democrat-controlled Congress. At press time, members of Congress were negotiating a version of the misleadingly named Employee Free Choice Act, which would impose compulsory arbitration on private companies that can't reach agreement with their unions. Meanwhile, the Obama administration is eliminating reporting requirements that forced some transparency on unions—notably the LM-30 Rule, which required union officials to report conflicts of interest, and the LM-2 rule, which required disclosure of financial information and information about labor leaders' compensation. And the president has pushed through labor-friendly takeovers of Michigan's auto industry.

Unions represent an Industrial Revolution–era understanding of labor relations. The modern American movement grew out of an assembly line culture where every product was identical and workers were viewed in a similar way. As that mode of production has declined, so have unions' relevance and power.

But in an increasingly mixed economy with government exerting outright or implicit control over large swaths of domestic output, private-sector unions may experience a comeback. That's especially true if the president delivers on his campaign promises. If that happens, we can expect businesses to be treated equally poorly by the government. To come back to our pizza delivery example, it won't matter how the companies get their product to your door; both will face high costs. And that means you will too.

Contributing Editor Veronique De Rugy ([e-mail]) is a senior research fellow at the Mercatus Center at George Mason University.