Starbucks with Unions: Lessons for Other Businesses

Unions are making small but persistent inroads at the largest coffee chain. Business leaders who may see union organizing efforts in their companies are concerned that their employees are following this path. Starbucks is not alone, as unions are trying to organize at Amazon and Apple stores as well as on Capitol Hill.

Starbucks employees at 60 stores in 19 states are trying to have their union recognized as the bargaining agent for workers at those stores. It’s a drop in the ocean for the chain of 9,000 stores. (Workers are already unionized at some of the Starbucks-branded stores operated by airports or grocery stores.) The trend worries Starbucks executives enough that they have gone to great lengths in Buffalo, New York, to prevent union success.

Union membership has been declining in the private sector for years. In the 1950s, membership peaked at 39% of private sector employees, but membership was only 6.3% in 2021. Unions remain strong in public sector employment, with 33, 9% in 2021.

The journey of private sector unions provides important insight into current challenges in union operations. In the heyday of industrial unions, steel companies paid higher wages than other industrial companies and then passed those costs on to their customers. Automakers paid these higher steel costs, as well as higher wages to their own unionized workers. They then passed those costs on to their customers in the form of higher car prices. Most of the cars sold in the United States came from one of these three big companies, all of which had the same union and the same unionized suppliers.

Auto unions lost power with the growth of imported cars, whose companies paid their foreign workers less than American wages. Then, foreign automakers built factories in the United States to circumvent protectionist tariffs and quotas. At first they settled in the industrial heartland, with a mostly unionized workforce, but in the 1990s they established factories in right-to-work states such as South Carolina, Alabama , Mississippi, Texas and Tennessee.

Throughout the country, unions approved by the majority of workers represent all workers in negotiations over wages, benefits and working conditions. In right-to-work states, nonmembers cannot be required to pay union dues, while other states allow union contracts that impose dues or the equivalent on all employees. (This description simplifies complicated rules.)

The result of unorganized autoworkers is that unionized companies lost market share and were unable to continue paying significantly higher wages than other similar paying jobs. The key point is that competition for consumers has prevented unions from obtaining high wages and benefits.

Will consumer competition prevent a unionized Starbucks from succeeding? Note that General Motors, Ford and Chrysler are still in business despite negotiations with a union in an industry that is not exclusively unionized. Starbucks is likely to survive, even if all of its stores unionize. However, if wages and benefits rise significantly above what independent cafes and smaller chains pay, consumers will see price differences. Some consumers may continue at Starbucks, either out of brand loyalty or union sympathy, but most consumers will prefer to pay lower prices.

Partial compensation for these costs will be that Starbucks can hire better quality employees. Low-wage employers must hire less skilled and less diligent employees, while high-wage employers may choose the cream of the crop. This idea, called the efficiency wage theory, was taken to suggest that employers would make more profits by paying higher wages. However, this view is tantamount to saying that business owners are insufficiently greedy or less knowledgeable about running a business than economic theorists. It is clear, however, that greater employee productivity will partially offset the simple arithmetic of the additional costs of higher salaries. In fact, Starbucks may have exploited this theory when it offered health insurance.

If unions are successful in winning high wages and benefits, unionized stores will either see lower sales due to higher prices or lower revenue per store due to higher costs. Passing personnel costs on to customers will reduce unit volume, thereby reducing the need for employees. The unionized part of the business will shrink.

If, on the other hand, the company bears the higher costs, some of its marginal stores will become unprofitable and will be closed. Locations considered for new stores will be avoided if union representation makes them unprofitable. The result is the same: fewer employees in sectors that are unionized. To the extent that the union earns above-market wages, union employment will decline.

Beyond coffee, recent unionization rates are likely triggered by the extremely tight labor market, in which there are more job vacancies than unemployed. When more normal conditions return to labor markets, organizing efforts will be successful primarily where there is little competition for customers. This applies to a few non-competitive sectors, such as utilities and government. In sectors competing for customers, unions will not get higher wages.

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