A New Hope for Hostess: Why Private Sector Labor Relations Work While Governments Fail

November 20, 2012 J

By Casey Given

Labor wonks and sweet tooths alike are on the edge of their seat as Hostess Brands’ labor drama continues to play out. After months of negotiation with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM), Hostess announced last Friday that it was ceasing all operations after “a nationwide strike that crippled the company’s ability to produce and deliver products at multiple facilities.” Though this decision may seem like a bargaining failure on behalf of unions, subsequent developments highlight the healthy nature of private sector labor relations that cannot be emulated by governments.

The beloved manufacturer of Twinkies, Ding Dongs, Ho Hos, and other American artery cloggers has been in financial trouble for years, having accumulated more than $850 million of debt to pay for its previous unsustainable promises to its unions. After finally realizing the woes of its ways in the past few months, Hostess asked its employees to take an 8% pay cut to keep the company afloat. Although unpleasant, the deal seemed to be the only lifeline to keep the lights on. Even the Teamsters accepted the deal on behalf of thousands of Hostess drivers. But, the bakers wouldn’t eat the loss, leading Hostess to announce the layoff of 18,500 employees nationwide.

Fortunately for dentists everywhere, the sugar packer may stay in business thanks to a U.S. Bankruptcy Court request to reenter mediation with BCTGM. Soon enough, the beloved Twinkie may reclaim its rightful space in convenience stores everywhere thanks to the healthy adversarial nature of private sector labor relations.

Indeed, Hostess’ current crisis is not the first time a union has failed to recognize that the company they bargain with is not bluffing about layoffs. Rather, it is a common occurrence in private sector labor relations. This summer, for example, the Allied Pilots Association rejected an ultimatum from American Airlines that included pay raises. American responded to their incredible denial by notifying more than 11,000 workers of potential layoffs, proving to the pilots that they mean business and bringing them back to the bargaining table.

This healthy tension in the private sector between employers’ interest in controlling labor costs and  unions’ interest of maximizing compensation usually leads to reasonable outcomes that both keep companies in business and satisfy employees. When a company’s existence is at stake, both parties are incentivized to meet in the middle in labor negotiations since nobody will be there to bail them out lest things go sideways. This beneficial back-and-forth explains why the future for both Hostess and American looks bright despite the setbacks.

Unsurprisingly, the government isn’t quite as sensible. Since the costs of collective bargaining in the public sector are diffused among taxpayers instead of concentrated in a company’s budget, it’s difficult for politicians to judge which bargains are fiscally sustainable. To make matters worse, public sector labor unions make large contributions to politicians’ electoral campaigns – greasing the wheels for favorable collective bargaining to civil servants, but not the taxpayer. As a result of these perverse incentives, American state and local governments owe over $3 trillion in unfunded pension and health care benefit liabilities today to their civil servants – a ticking time bomb that threatens to explode on taxpayers across the country.

Although it’s easy to demonize unions for delaying our flights or temporarily taking away our favorite sweets, we must remember that the larger problem with collective bargaining is in the government, not the private sector. Market incentives almost always guide employers and their unions to reach reasonable agreements that keep companies afloat and workers happy. Since such incentives do not carry over to the government, citizens must hold their politicians accountable to bringing the private sector’s market mentality to the bargaining table. Only then will they reach responsible agreements that won’t bankrupt our states and jeopardize our economic futures.

To learn more about the differences in private and public sector labor law, check out Americans for Prosperity Foundation’s Need to Know issues on the two topics.

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