ANIL VERMA” Relative Flow of Capital to Union and Nonunion Plants Within a Firm THE RAPID GROWTH OF THE NONUNION SECTOR within the U.S. economy since the sixties suggests that the unionized sector inay have received relatively fewer dollars in new investments. The shift in the sectoral mix of the economy from “smoke-stack” to “silicon chip” industries accounts for some of the movement of resources away from the unionized sector, but there are indications that the size of nonunion operations within the traditional industries may also have grown (Farber, 1985; Freeman, 1985; Dickens and Leonard, 1983). One possible explanation for this change in the relative size of the union and nonunion sectors lies in management’s preferences and decision inaking (Verma and Kochan, 1985; Kochan, McKersie, and Cappelli, 1984). This paper presents evidence from case studies of two industrial firms, each having comparable union and nonunion plants.’ For both firms, how management responds to the strategic choices it faces in investment decisions has significantly affected investment flows between the union and nonunion plants. Theory Price theory argues that when a union succeeds in raising wages and benefits, management inay respond by substituting more capital for the relatively more expensive labor (Johnson and Mieszkowski, 1970). Thus, union plants are likely to be inore capital-intensive than their nonunion counterpart^.^ In price-theoretic terms, ceterus paribus, a firm will open a *Assistant Professor, Faculty of Commerce and Business Administration, University of British Columbia. IThe author wishes to thank Harry Katz, Toni Kochan, David Lipsky, Boll McKersie, Mark Thompson, and anonymous reviewers for helpful comments on an earlier version of‘ this manuscript. ”Slichter (1941) proposed that firms respond to the “shocks” of unionization by increasing efficiency tlirougll increased rationalization and bureaucrati7,tion of management systems. h w i s (1963) hypothesized that unionized firms inay also respond by hiring higher quality workers. For a detailed discussion of overall management response to unions, see Brown and Medoff (1978) and Clark (1978). ?Some empirical studies report higher capital-to-labor ratios in unionized firms in manufacturing, con- struction, and underground bituminous coal mining industries (see Allen, 1979, 1983; Brown and Medotf, 1978; Clark, 1980). INI)USTHIAL Rel.ATIONs, VoI. 24, No. 3 (Fall 1985). 0198s by the Regents of the Universitv of California 0019/8676/8S/215/395/$10.00 395
Transcript
ANIL VERMA”
Relative Flow of Capital to Union and Nonunion Plants Within a Firm
THE RAPID GROWTH OF THE NONUNION SECTOR within the U.S. economy since the sixties suggests that the unionized sector inay have received relatively fewer dollars in new investments. The shift in the sectoral mix of the economy from “smoke-stack” to “silicon chip” industries accounts for some of the movement of resources away from the unionized sector, but there are indications that the size of nonunion operations within the traditional industries may also have grown (Farber, 1985; Freeman, 1985; Dickens and Leonard, 1983).
One possible explanation for this change in the relative size of the union and nonunion sectors lies in management’s preferences and decision inaking (Verma and Kochan, 1985; Kochan, McKersie, and Cappelli, 1984). This paper presents evidence from case studies of two industrial firms, each having comparable union and nonunion plants.’ For both firms, how management responds to the strategic choices it faces in investment decisions has significantly affected investment flows between the union and nonunion plants.
Theory Price theory argues that when a union succeeds in raising wages
and benefits, management inay respond by substituting more capital for the relatively more expensive labor (Johnson and Mieszkowski, 1970). Thus, union plants are likely to be inore capital-intensive than their nonunion counterpart^.^ In price-theoretic terms, ceterus paribus, a firm will open a
*Assistant Professor, Faculty of Commerce and Business Administration, University of British Columbia. IThe author wishes to thank Harry Katz, Toni Kochan, David Lipsky, Boll McKersie, Mark Thompson,
and anonymous reviewers for helpful comments on an earlier version of‘ this manuscript. ”Slichter (1941) proposed that firms respond to the “shocks” of unionization by increasing efficiency
tlirougll increased rationalization and bureaucrati7,tion of management systems. hwis (1963) hypothesized that unionized firms inay also respond by hiring higher quality workers. For a detailed discussion of overall management response to unions, see Brown and Medoff (1978) and Clark (1978).
?Some empirical studies report higher capital-to-labor ratios in unionized firms in manufacturing, con- struction, and underground bituminous coal mining industries (see Allen, 1979, 1983; Brown and Medotf, 1978; Clark, 1980).
INI)USTHIAL Rel.ATIONs, VoI. 24, No. 3 (Fall 1985). 0198s by the Regents of the Universitv of California 0019/8676/8S/215/395/$10.00
395
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new facility (i.e., invest in nonunion operations) only after reaching the physical limit on capital substitution for labor in unionized operations. Alternatively, before reaching this limit, firms may open new (nonunion) plants rather than expand unionized operations.
The trend towards opening new plants may reflect, in part, a firm’s desire to take advantage of a “high commitment work system” (see Walton, 1980). This is an alternative method ofhuman resource management that has evolved since the sixties. It is designed to provide employees with greater involvement on the job and to give management greater flexibility with respect to production. Given the nature of this alternative management system, it may be easier to implement in a small plant with a newly hired workforce than in an existing union plant.
Another factor may be management’s ideological opposition to unions (Ozanne, 1967; Harris, 1982). Recent evidence suggests that the long-standing willingness of employers to oppose unions has been reinforced in recent years with the ability, in the form of newly developed expertise, to prevent union- ization (Verma and Kochan, 1985). To decrease the probability of unionization, management’s strategy involves opening new plants in areas where the threat of unionization is low, keeping the workforce small, and managing it using the alternative human resource approach. In a national sample of 163 new plants, 85 per cent of those opened between 1975-1979, and 75 per cent of those opened between 1970-1975, remained nonunion by 1981 (Schmenner, 1982). In one of the firms examined in this paper (Firm B), only two plants out of 25 opened since 1960 had been unionized by 1983. Clearly, firms with a goal of remaining as nonunion as possible have a real incentive to open new plants. Even where management is not ideologically opposed to unions, nonunion options may be preferred in order to avoid uncertainties associated with work stoppages. Finally, in unionized firms where the quality of the labor-management relationship deteriorates and thus imposes additional costs, management may begin to look for nonunion alternatives. Some recent empirical studies have supported the view widely held by management that unions lower a firm’s profitability (Clark, 1984; Freeman and Medoff, 1984).
The probable effect of a shift towards new plants is that larger and larger amounts of capital will flow into the nonunion sector and away from the union plants. As the latter are starved of new capital investments, their aging plants and machinery will depreciate to levels that will require either closure or sale (Bluestone and Harrison, 1982). In this event, one would expect to find nonunion plants more capital-intensive than the unionized plants.
Flow of Capital to Union and Nonunion Plants I 397
Evidence Case studies of two large U.S. manufacturing firms provide
concrete evidence of the gradual shift of investments away from the union sector and into new nonunion operations. Each firm has pursued a strategy of disinvestment, but in one case (Firm A), the shift towards nonunion plants has been relatively rapid, while in the other case (Firm B), it was slower.
Fimz A. The focus here is on one major division of a large firm engaged in the production of industrial goods. This division began operations in 1918 at a site in the northeast called Kingstown (all names are pseudonyms). Largely due to management commitment to investment in the plant, business grew manyfold between 1916 and 1945, despite several ups and downs during the Great Depression and other minor recessions. The plant remained nonunion through the twenties and much of the thirties. In the late thirties, it was organized by an international union which initially was relatively docile, acting as a sort of “company union.” In the early forties, the plant employed 13,000 workers (many of whom lived in company-built housing near the site). After the war, employment declined and by the late fifties held steady at about 8,500 (see Figure 1). Beginning in 1948, management and the union battled through two long and bitter strikes, each involving the same issue - incentive rates. An accelerated disinvestment strategy began to take shape within the company beginning in the sixties. In 1963, some operations were moved away from Kingstown to a nonunion operation, resulting in a loss of 400 jobs. In the 20 years between 1963 and 1982, a total of 2,340 jobs were shifted to new nonunion facilities.
Besides moving existing work to new locations, the company has also made new investments in plants that are designed to remain nonunion. Three new plants were opened in the southeast between 1967 and 1972 to add capacity in product lines already covered by the Kingstown plant. As a result, the nonunion sector within the division has grown rapidly; by 1983, the nonunion units employed 3,700 workers compared to 2,100 in the Kingstown plant. The company plans to further reduce the employment in Kingstown to 1,200 by 1985. Even modest growth rates would suggest that employment in the nonunion sector would grow to 4,500, which would make the union sector’s share of total employment about 21 per cent, down from 100 per cent 20 years ago.
Between 1965 and 1970, when the nonunion sector was beginning to take shape, gross assets grew by 77 per cent (in 1972 dollars) in the Kingstown plant. This growth rate slowed to 59 per cent between 1970 and 1975 and 47 per cent between 1975 and 1980. It is believed that growth has slowed
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Flow of Capital to Union and Nonunion Plants I 399
still more since 1980. In contrast, the nonunion operations within the same division have grown steadily and dramatically - the real growth in their assets between 1970 and 1975 was 177 per cent. Although this figure fell to 72 per cent between 1975 and 1980, it was still many times the growth rate at the Kingstown plant. Similar trends are observed in the growth of net fixed assets (see Table 1). Between 1970 and 1975, net fixed assets4 increased by 19 per cent in real terms in the Kingstown plant, while the nonunion operations grew by 137 per cent. Between 1975 and 1980, Kingstown assets declined 2 per cent compared to an increase of 32 per cent for the nonunion plants.
There is some indication of capital substitution in the union plants even as new nonunion plants were opened. In gross terms, capital per employee (in 1,000s of 1972 dollars) in Kingstown increased from 11.81 in 1965 to 92.36 in 1980, when the ratio was 135.05 in the nonunion sector. Net fixed investment at Kingstown increased from 5.11 in 1970 to 19.76 in 1980. Although the nonunion ratio also declined after an initial increase, it was four times as high (at 79.54) in 1980.
The evidence suggests that Firm A’s management formulated and imple- mented a strategy of rapid disinvestment over the last 20 years. The Kingstown plant has turned a profit in most years since 1960, and in the last three years has actually improved its profitability. According to the plant manager, the Kingstown plant easily qualifies €or new investments, but a change in the company’s strategy of disinvestment is doubtful:
We have improved the profitability of this plant at a time when it has constantly been downsized. This is normally a very difficult task, but we have made it possible through a number of improvements in process and procedures. Labor costs in our plant are nearly identical to those in the southern nonunion plants. We have also made tremendous improvements in labor-management relations. Yet, the plant con- tinues to lose jobs. We are slated to go down to the 1,200 employee level by 1985. I suspect that the plant may end up even smaller than this figure. The Management
TABLE I NET FIXED ASSETS: KINCSTO~VN A N D COMPLEMENTARY NONUNION PLANTS
(IN 1,000s OF 1972 DOLLARS.’) - .____ ~ - _ _ _ _ - ~- -.
Year Kingstown Per cent N on u iiioii Per cent increase increase
‘Department of Commerce price deflator kir nonresidential private, domeatic, fixed investinent was nacd.
‘Net assets are calculated to reflect replacement cost assuming a useful life of 20 years for plant and equipment. Such a life span is considered by plant managers to be a “realistic” average for the type of technology employed.
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Committee [consisting of Chairman, Vice-chairman, President, and five Vice-Pres- idents] has come to regard Kingstown as a problem child because of the turbulent labor-management relations in the early years. We have tried to change that image at the head office with only marginal success.
F i r m €3. This is a large conglomerate employing in excess of 94,000 workers in 300 locations in the U.S. and other coun t r i e~ .~ The company manufactures a wide range of industrial products in all parts of the U.S. The firm remained unorganized until the late forties, although serious organizing efforts had begun early in that decade. During much of the period, a high-profile company president pursued a nonunion/”pro-employee” policy. In this kind of approach, management views the union as an “outsider” with no constructive role to play in an employment relationship best dealt with on a bilateral basis between the employer and the employees (Harris, 1982). This philosophy was so well ingrained in the company during the long reign of this president that, for decades to follow, it was the force underlying the company ’s efforts to develop close contacts with employees.
When unionization was seen as inevitable in the late forties, the company sponsored its own unions. Although these unions later became autonomous, the company continues to see them as their “own boys,” in contrast to the international unions which came into the company during the acquisition phase in the sixties. By the seventies, the company had developed a strategy to open new nonunion plants; however, no attempt was made either to dislodge existing unions through decertification drives or to rapidly divest or close unionized plants. In contrast to Firm A, no appreciable quantities of production thus far have been moved away from a union plant.
Nevertheless, evidence on capital investments in the union and nonunion sectors within the firm demonstrates management’s preference for nonunion plants. A group of eight plants, five nonunion and three union, were selected for the purpose of this study. All manufacture either the same or very similar products, using substantially similar technology. Table 2 shows the average age of plant and machinery in the eight plants. As expected, in the nonunion sector a much larger percentage (38 per cent) of the capital is five years old or younger; in the union sector, a much larger fraction (46 per cent) is 15 years or older. Clearly, some of the difference in the age of plant and machinery is due to the difference in the average age of the union and nonunion plants. The average age of the plants does not, however, fully account for the observed differences. The next two columns in Table 2 show the nonunion plants regrouped to differentiate among plants opened before (“old nonunion”) and
5For a detailed account of the history of Firm B, see Verma (1983).
Flow of Capital to Union and Nonunion Plants I 401
after (“new nonunion”) the emergence of the modern nonunion strategy in the firm. Despite an average age of 50.5 years, the old nonunion plants show a large percentage (67 per cent) of capital inflow that is less than ten years old. The comparable figure for the union sector is only 35 per cent. These figures suggest a twofold business strategy: first, the firm has constantly opened new, small plants instead of adding capacity in older unionized plants; and second, it has invested more heavily in the older nonunion plants than in the union plants.
Year-to-year expenditures on plant and machinery also corroborate this shift in resources. Table 3 shows the capital expenditure per employee in our eight-plant sample from 1971 to 1981. Expenditures in union plants are consistently lower overall and in each of the 11 years. When these data are broken down into union, old nonunion, and new nonunion plants, it is clear that capital expenditures in the union plants have been lower than in the old nonunion plants (Table 3). Expenditures in new nonunion plants were, once again, higher than in the old nonunion plants. Thus, the difference in ex- penditures cannot be attributed solely to age.
Business Strategies and the Speed of Disinvestment Firms A and B are similar in that they both have diverted new
investments away from their union plants, but they’differ substantially in the speed with which relative disinvestment in the union sector has occurred. A comparison of the age of plant and machinery between the Kingstown plant (accelerated disinvestment) and the union plants of Firm B (slow disinvestment) illustrates the differences in the speed of disinvestment. At Kingstown, only 5 per cent of total capital was acquired in the last five years. This implies that new capital was acquired at the rate of approximately 1 per cent per annum. Since this is far lower than the rate at which the total capital is depreciating, it means that plant and machinery at this site are being depleted
TABLE 2
FIRM B: PLANT AND MACHINERY BY AGE GROUP (1983)
___ ______ Age group Union Nonunion Old NU New NU
(n = 3) (n=5) (n=2) (11 = 3)
5 - 10 years 15% 41% 55% 22%
15 + years 46% 15% 20% 10%
__ _ _ 0 - 5 years 20% 38% 12% 42%
10 - 15 years 19% 6% 13% 25%
Average plant 42.3 26.6 50.5 10.7 age years years years years
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TABLE 3
(IN 1965 DOLLARS PER EMPLOYEE)
Year Union Nonunion Old NU New NU
FIRM B: EXPENDITURES ON PLANT AND MACHINERY BY UNION STATUS AND AGE
in absolute terms. Also, in Kingstown, only 25 per cent of the total plant is 15 or fewer years old. In the sample of three union plants in Firm B, the comparable figure is 54 per cent.
Further, investment in the last 15 years in Firm B’s union sector accounts for 54 per cent of the total investment (see Table 2). This works out to an average of 3.6 per cent per annum, which is roughly the annual rate of replenishing the capital if we were to assume a plant life of 25 years. This is below the rate of capital replenishment in nonunion plants, but not as low as in the case of accelerated disinvestment. It would appear that management is making just enough investment to keep the plants profitable in the short run. Larger investments like adding new product lines and increasing installed capacity have clearly been diverted away from the union sector.
Why Firm B chose not to pursue an aggressive disinvestment strategy in the union sector is an important question. According to several managers who were interviewed, seeking to dislodge unions either through decertification attempts or accelerated disinvestment in union plants would impose unac- ceptable costs on the operations. Also, given the long tradition in the company of close and informal contacts with employees, most managers at middle and top levels expressed concern for those older unionized plants that were running on low profit margins. One vice-president said:
These [older unionized] plants are important in a way. They represent the company of the old days. This is the part of the company that helped us grow step by step to our present size and strength. We must and will do everything in our power to save these plants from going under. We have always worked with the unions, and I don’t see why we can’t do this now.
This kind of identification of the older managers with the older plants may have influenced the company’s choice of a relatively slow disinvestment strategy.
Flow of Capital to Union and Nonunion Plants I 403
Conclusions Although the sample size is small, these two case studies clearly
corroborate the observed macro trend of growth in the nonunion sector and relative decline in the union sector. It is difficult to infer how widespread such trends are, but certain hypotheses can be offered about the characteristics of firms that choose such investment patterns: (1) firms with a history and an ingrained culture of union avoidance are more likely to shift investment to nonunion operations; (2) similarly, firms with a long history of conflict in union-management relations are likely to disinvest; (3) firms with greater expertise and experience in alternative human resource management systems may pursue such investment policies because of their ability to stay nonunion in newer plants; (4) firms with employees who are represented by multiple unions with little or no coordination in formulating joint bargaining strategies are likely to move resources away from union plants. In such cases, unions cannot effectively engage management in a dialogue over these issues. In Firm B, for example, the unions have neither the overview to comprehend fully the impact of such an investment strategy nor the power to challenge management’s actions; and (5) firms with mature and stable technologies may be more likely to invest in low (labor) cost, new, nonunion plants because of their limited ability to substitute capital for labor.
In Firm A, management’s motive for pursuing a strategy of disinvestment seems to stem mainly from a preference for nonunion operations. Between 1918 and 1958, the firm demonstrated a commitment to the (union) Kingstown plant by investing and reinvesting in newer product lines and keeping the large facility productive at high levels of employment. Since the inauguration of the disinvestment strategy in the sixties, no new product lines have been brought to Kingstown, and some existing lines were moved from that facility to new nonunion locations. Thus, shifts in products and technology can be ruled out as the sole motive for relocation. Today, much of the factory space at Kingstown (2.5 million square feet) remains vacant, while additional space has been built in southern plants continuously over the last 20 years.
Because of the conglomerate nature of Firm B, it is more difficult to reject structural factors such as products, markets, technology, etc., as motives for shifts in investment patterns. For example, it is possible that some of the union plants were “cash cows” (i.e., operations that turn profits in the near term, but which have no long-term potential). In that case, the plants would
61n contrast, where the union is strong enough to challenge management, disinvestment may be stopped or at least slowed considerably. For example, at General Motors, the union (UAW) was able to challenge management’s decision to open nonunion plants in the South. The UAW recognized the potential impact on its membership of GM’s investment decisions, and it had the power to force management to stay neutral in organizing campaigns in the newer plants (Katz, 1985).
404 I ANILVERMA
not be shutdown rapidly but, instead, left to depreciate slowly without any major new infusion of capital. On the other hand, this firm has a long history of preference for a union-free work environment, as reflected in its willingness and ability to keep many of its old and new facilities nonunion. The evidence shows that union plants with similar products and technology received less capital than either new or old nonunion plants. Thus, it is likely that preference for nonunion status has also played a part, along with other factors, in investment decisions.
Lastly, both firms clearly and formally state a policy of union avoidance in their newer nonunion operations. While specific actions vary within and between the two firms, the general thrust of such policies is to actively oppose unionization efforts through vigorous communication campaigns in which the first-line supervisor plays a key role. This evidence does not “prove” that investment decisions are influenced solely by union avoidance, but it does point to nonunion preference as an important factor.
Zmplications for industrial relations. In many ways, Firms A and B fit the dominant profile of collective bargaining in the U. S. manufacturing sector - well-articulated union avoidance objectives, flexibility in plant locations, and separation of management decision making from collective bargaining and workerhnion influence. In both cases, business and investment strategies are formulated at the corporate level by top management, while the industrial relations consequences of such decisions are left to local management and the union to sort out. In Firm B, it appears unlikely that adjustments within collective bargaining at Kingstown can alter the disinvestment strategy de- veloped at headquarters. In Firm B, the separation between business decisions and industrial relations is institutionalized in the decentralized plant-by-plant bargaining structure. Local union officials thus have no effective means of communicating with corporate executives.
Separating plant-level developments from business decisions can be a source of inefficiency and instability in the system. On one hand, top management may overlook union plants’ potential opportunities for future growth. On the other hand, the frustration of local management and unions with their inability to influence investment decisions can lead to reduced effort in making ad- justments in collective bargaining and, thereby, opportunities for making profits in the short-term may also be compromised. Unless collective bargaining considerations are linked more positively to business decisions, union plants will continue to decay. The withering away of the union sector will only increase instability and inefficiency in industrial relations.
Flow of Capital to Union and Nonunion Plants I 405
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