Recently, the United Auto Workers (UAW) went on a synchronized strike against the Big Three automakers in Detroit. While only a fraction of UAW workers participated, the strategy of striking against all three companies simultaneously is worth noting.
In the past, the UAW would choose one automaker to strike, negotiate concessions, and then leverage that agreement to pressure the other automakers into a similar deal. This approach would disrupt operations in one company without completely shutting down the entire car manufacturing capacity in the country. However, in this strike, the UAW is impacting operations in all three companies while avoiding a complete shutdown – although the implied threat of a complete shutdown remains.
What is particularly interesting is the audacity of the union’s demands. They are asking for a 36% pay increase over four years, along with a reduction in the workweek from 40 hours to 32 hours while still being paid for 40 hours. When combined, these demands result in a 70% increase in compensation per hour for union employees. Additionally, the union is seeking the restoration of defined-benefit pension plans and contracted cost-of-living adjustments. These additional demands are not included in the 70% figure.
Whether or not the UAW is successful in achieving a significant portion of their demands, it is clear that this is one of the most ambitious labor movements of the past 25 years. The timing of this strike is not surprising, as historically, union size and activism are positively correlated with the level of inflation.
Contrary to popular belief, unions do not necessarily gain strength during periods of high unemployment. In such situations, unions would be asking companies to provide jobs even when there is no work available, potentially threatening the company’s viability in a weak economy. Consequently, union actions during recessions tend to be less robust. Unionization is also less valuable to workers in times of high unemployment.
On the other hand, during inflationary periods, unions request more for their existing workforce from companies that are experiencing growth in revenues and profits. Even though these revenues and profits may appear less impressive due to inflation, the unions argue that workers should benefit from the company’s success. Inflation affects all workers, unlike unemployment which primarily impacts the jobless individuals. As a result, inflation is a primary factor that energizes unions.
This dynamic is part of the feedback loop that concerns policymakers. Typically, discussions around the wage-price feedback loop focus on core services ex-shelter (“supercore”), where labor costs account for a significant portion of the product’s total cost. For example, in the case of a car, labor costs make up only about 15% of the total cost, though the exact figure varies. Therefore, a 70% increase in labor costs would only contribute around 10% to the cost/price of a new car.
However, union power extends beyond immediate cost increases. It also leads to automatic cost-of-living adjustments, persistent pressure on fringe benefits, and pensions. Unions gain influence in environments where inflation and their momentum are growing.
It is not to say whether this is good or bad, but it highlights one of the consequences of allowing short-term inflation spikes to persist without aggressively addressing them early on by reducing the balance sheet.
Ultimately, as inflation stays high for longer, unions gain more power. In turn, this increased union power fuels further inflationary momentum.
