Is your business struggling with the labor shortage? Consider a union

Last week, baristas at a Buffalo, NY Starbucks voted overwhelmingly to unionize, creating the first unionized Starbucks store in the US. The union victory came despite Starbucks fighting tooth and nail to thwart it. Amazon took the same aggressive anti-union approach in Bessemer, AL earlier this year; the National Labor Relations Board has since thrown out the results of the vote due to Amazon’s “dangerous and improper” messaging.

It’s called union-busting, and those are just the highest-profile recent examples. Companies tell shareholders that the millions of dollars spent on anti-union consultants, anti-union training, and even store closures ultimately save them money. But that may not be true, especially now. With workers quitting jobs at record rates and employers struggling to hire, unionized companies have a major competitive advantage: their workers stick with them. In this labor environment, union-busting may be the wrong business strategy.

By driving employee retention, unions can be good for business—particularly when the labor market is tight

Many people know unions are good for workers. Union members earn 11% more than nonunion peers, and unions help secure critical benefits such as paid sick leave, health and safety protections, and job security. What is less well known is that unions can be good for business too. It’s true that higher wages and better benefits can be costly for employers if not accompanied by higher productivity. But unions also make employees less likely to quit their jobs. A combination of better pay and benefits, more upward mobility, and the ability to exercise voice gives unionized workers reason to stay.

Employee retention is critical right now, with job quits at historic highs and millions of roles unfilled. Even in a normal labor market, the cost of replacing a single low-wage worker is around 20% of annual pay; that includes direct hiring costs and the lost productivity that comes with turnover. At a company like Amazon, which has an employee turnover of 150%, that can add up to billions of dollars each year.

As long as new hires are plentiful, a low-pay/high-turnover model can be profitable. But today, new hires are not plentiful. High-turnover companies are understaffed, taking a heavy toll on operations and profits. Starbucks has had to reduce hours at certain stores due to insufficient labor, while Macy’s is sending corporate employees to cover shifts in stores.

This may be the new normal. It is now clear that the labor shortage was not caused by generous temporary pandemic unemployment insurance. Instead, researchers point to a newfound unwillingness to tolerate low pay and poor working conditions; a lack of access to childcare, which keeps many mothers at home; concerns about getting Covid; demographic trends, including an aging population, many of whom retired early; tight immigration policy; and, increasingly, mounting disability due to long Covid. The overall labor force participation rate—the percentage of the population working or looking for jobs—is shrinking. Absent a dramatic change in immigration policy, Long Covid healthcare, or support for working mothers, experts agree that hiring is likely to remain a challenge in the future.

Financial performance at Amazon and FedEx, versus UPS demonstrates the value unions can bring

What will this mean for businesses? Recent financial results from the country’s best-known delivery companies give us a preview. Unionized UPS had a very strong third quarter. Operating profit was up more than 20% year-on-year, and the company raised projections for its full-year results. When investors asked CEO Carol Tomé about the labor shortage, she seemed genuinely unconcerned: “I feel really good about our ability to manage through the labor cost inflation that many companies are struggling with today.”

Nonunion FedEx and Amazon did not fare as well. The labor shortage cost FedEx nearly half a billion dollars, primarily in lost productivity due to understaffing. Profit declined on a year-on-year basis, and the company lowered its financial projections. Amazon incurred $2 billion in additional hiring costs and lost productivity, and anticipates spending twice as much in the fourth quarter. In large part due to these costs, Amazon’s profit declined nearly 50%. Stock prices at both companies dropped. “The impact of constrained labor markets remains the biggest issue facing our business,” FedEx’s president, Raj Subramaniam, said.

How much do UPS’s unions contribute to its success? Well, they have secured some of the highest wages in the industry for their drivers: $36 an hour on average. And annual wage increases are guaranteed by a multiyear collective bargaining agreement. This gives UPS drivers good reason to stay on the job, and their average tenure is 16 years. Low turnover reduces UPS’s need to hire and gives the company operational stability.

Amazon and FedEx offer lower pay and less upward mobility. Both use contract drivers; a 2018 analysis found that Amazon Flex and FedEx drivers earned around $5.30 and $14.40 per hour, respectively, compared to UPS’s then-rate of over $23. At Amazon warehouses, new hires earn an average starting wage of $18.50, but because there is so little upward mobility, $18.50 is also the company’s average wage. Unsurprisingly, Amazon appears to have much more trouble recruiting and retaining employees than UPS, leading to higher costs despite their lower pay.

Companies that embrace the benefits of unions may have a competitive advantage in this new era

We are not so naïve as to think business leaders at Amazon, Starbucks, or elsewhere will welcome unions with open arms. Companies will continue to assume they can retain employees without unions—after all, nonunion Costco has employee turnover of less than 15%. But in practice, Costco is an outlier; most companies find it hard to prioritize the investments and work required to get employees to stay.

So as the cost of turnover continues to rise, and as today’s labor shortage becomes tomorrow’s norm, the cost-benefit analysis of union-busting should change. Having a union may actually save a company money—particularly if management and labor can work together productively, as at UPS. Starbucks, meanwhile, has an opportunity to test this hypothesis, by closely tracking performance at their newly-unionized store, and any that follow. Companies with the foresight to move in this direction may be the big winners of our new era.