Reason’s Shikha Dalmia on EFCA’s Binding Arbitration Provision

With Al Franken joining the Senate, public attention is again turning to the so-called Employee Free Choice Act (EFCA). In the weekend Wall Street Journal, the Reason Foundation’s Shikha Dalmia makes the case against EFCA’s binding arbitration provision, which has not gotten nearly as much public scrutiny as its now-infamous secret ballot-circumventing card-check provision.

As she notes, many state and local governments have extended compulsory arbitration to their employees, especially public safety workers, in exchange for their giving up the right to strike — to those governments’ subsequent chagrin.

Exhibit A: Michigan.

In 1969, the Wolverine State embraced a form of compulsory arbitration nearly identical to the one proposed in EFCA to resolve disputes with its police and firefighters. Years later, Detroit mayor Coleman Young — who had authored the original law as state senator — rued what he had done. “We now know that compulsory arbitration has been a failure,” he lamented to the National Journal in 1981. “Slowly, inexorably, compulsory interest arbitration has destroyed sensible fiscal management and has caused more damage to the public service than the strikes it was designed to prevent.”

Here’s why:

This process is supposed to install a contract expeditiously. But a review of 29 arbitration cases in 2005 and 2006 by the Michigan-based Mackinac Center for Public Policy found that the average time involved in a case was almost 15 months — not the four-and-a-half months that the law prescribed, defeating its whole purpose. Moreover, because an arbitration board doesn’t have to live with the consequences of its decision, it has no reason to come up with a workable solution — just one that is politically expedient.

This kind of arrangement has contributed to the dire fiscal situations in which many states and localities now find themselves. During the 1990s boom, increased tax receipts from economic growth enabled governments to pay increased wages and benefits imposed by arbitration. But as the economy turned south, tax revenues have gone down even as those commitments have stayed the same (or even grown).

And now organized labor wants to wrap this millstone around the necks of private employers.

Should EFCA pass, the costs of compulsory arbitration in the private sector will dwarf those in the public sector. That’s because businesses, unlike government, can’t just bill taxpayers to pay off unions. They have to compete.

In a dynamic economy, a business’s survival depends upon its ability to constantly cut costs and innovate. But a company forced into binding arbitration will be frozen for two years (the duration of the initial contract) from making any changes to any aspect of its business that is covered by the contract. Literally every issue — from its 401(k) contributions to its reliance on outside labor — could potentially become subject to review by a government panel that has neither the company-specific knowledge nor the incentive to turn a profit.

In fact, if some unions had their way, 401(k) contributions would be replaced with payments into critically underfunded multi-employer union pension funds. For newly unionized companies brought into these plans, this would represent tens of millions in new liabilities. For many of those companies, it could spell doom. And for what? To subsidize organized labor’s use of pension funds for political activism.

For more on EFCA’s binding arbitration provision, see here.

For more on EFCA in general, see here.