Laws Against Plant Closings

Dr. Hans Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

“Never again in Massachusetts,” Governor Michael S. Dukakis recently promised factory workers, will they “lose their livelihoods with no warning, no health insurance for their families and no chance to plan what comes next.” The governor had just signed a law for the protection of workers against plant closings, imposing severance-pay requirements on employers and exacting other benefits for displaced workers. Three other states—Connecticut, Maine and Wisconsin—have similar laws. The legislatures of twenty-four states repeatedly considered plant-closing bills; two cities—Philadelphia and Pittsburgh—passed ordinances. Moreover, the courts and National Labor Relations Board are doing their part in making plantclosing restrictions the law of the land.

Plant closings always impose painful costs on the participants—owners and managers, workers, local governments and local businesses. The media describe the burdens in vivid colors—the loss of jobs and livelihood, the poverty and despair, the revenue loss and fiscal distress, the business decline and community decay. But it is most significant that, in all their intense coverage, not a word is uttered about the tremendous adjustment costs to the owners. In fact, all discussions and proposals for relief merely pertain to the type and magnitude of benefits to be exacted from the owners. Typical provisions of plant-closing laws exact owner-paid severance benefits, owner reimbursement for employee retraining, continuation of health insurance coverage for specified periods after termination, payments to government of specific proportions of the annual wage bill, reimbursement for employee relocation expenses, paid leave time, etc., etc.[1]

Need versus Greed

The argument made in defense of such employer levies usually is threefold. First, the basic need of workers for work, wage and sustenance morally takes precedence over the owner quest for profits. In the language of displaced workers, worker livelihood takes precedence over employer greed. Second, employers are morally obliged to reinvest their profits in the plant in which they were earned so that the workers who earned the profits may benefit from them. If labor is a source of profit it is rightful and just that labor should be a beneficiary of profit. Third, labor legislation and National Labor Relations Board regulations have created unchallengeable job rights that shelter organized labor from the competition of independent labor. If organized la bor has job priority over competing labor, it may also have proprietary rights. If organized workers have a legal right to their jobs it must not be denied by the owners. After all, human rights are said to take precedence over property rights.

When presented in such contra-position, which is borrowed from the stratagems of debate, the answer is as plain as the nose on one’s face. Basic needs proceed from life, which is God’s creation. Who would want to argue against the priority of such needs? However, most needs are not from nature, but from custom and education. The American steel worker who faces disemployment waxes about his needs that exceed greatly those of other American workers and surpass by far the simple wants of his foreign peers.

Case studies of plant closing clearly reveal that it affects primarily high-seniority workers. Young workers are laid off long before the closing, during periods of stagnation and decline when losses are suffered and output is reduced. They are the primary victims of unemployment. The workers who are left when the gates shut permanently usually are 40 to 55 years old, have high job seniority, enjoy occupational status, have little education, and earn exceptionally high wages.[2] In 1982 the steel worker whose plant closed down was earning some 189 percent of wages and benefits paid in all manufactures. The automobile worker whose plant shut down was earning 165 percent of wages and benefits paid in all manufactures.[3] Both the steel worker and automobile worker were senior members of powerful labor unions.

It is doubtful that most owners can match the incomes of steel and auto workers. There are millions of stockholders who directly and indirectly invest their savings in corporate ownership. Most stockholders are middle-class Americans with average incomes who, for a greater and safer future, save a percentage of their incomes. They may own stock directly or through intermediaries such as pension funds, life insurance companies, investment companies and credit unions. When seen in this light, there are few Americans who do not invest in corporate production; 998,000 men and women directly own General Motors Corporation, 216,000 own U.S. Steel.[4] The median earnings of American males, in 1982, were estimated at $19,292, and those of women at $12,532.[5] But steel and auto workers were earning between $23 and $25 an hour, or $46,000 to $50,000 per year. It is doubtful that they earned less than most stockholders. Some 75,080 U.S. Steel stockholders were women; it is unlikely that many earned more than steelworkers.

Plant closing makes the loss of the job definite and final. Disemployed workers may encounter great difficulties finding comparable positions. But stockholders may be able to salvage all or most of their investments; they may gather their profits and desert the ship—at least, this is how many workers are viewing the situation. If it were actually true that plant closings are so profitable to owners, thousands of factories and workshops would be closing every day of the week. Why should there be any production if shutdowns are more profitable? In fact, a shutdown is a desperate measure designed to minimize losses and taken in frustration and despair about a hopeless situation. It usually inflicts severe losses on owners. When production stops, both wages and capital income grind to a halt. The owner may lose not only his income but also his savings, that is, his capital substance, which may have taken many years to accumulate.

Two particular situations short of bankruptcy may induce an owner to call a halt to production. When his plant or workshop is expected to suffer losses that in time are bound to consume his capital, he can be expected to order the shutdown. If he fails to give the order a bankruptcy judge will give it in the end. Or creditors may call a halt by refusing to grant any more credits and demanding repayment. To avoid losses is to protect not only one’s material substance but also the jobs of fellow workers. It safeguards the apparatus of production that generates both capital yield and labor income and preserves labor productivity and levels of living. If these are moral ob jectives it follows that avoidance of loss is a moral task.

The owner may rightfully and morally consider a shutdown when his plant or workshop is expected to earn net returns that are consistently lower than the market rate. It is a basic principle of the private property order that the rate of return indicates the urgency of human wants and the efficiency with which they are served. A twenty percent return, for instance, may indicate service of a relatively urgent want, a two percent return a low-priority want. A twenty percent return may be a reward for a job well done and an inducement for reinvestment; a two percent return may signal consumer reluctance or withdrawal. To serve the latter is to ignore the former and allocate scarce resources to the satisfaction of less important wants. It impairs the economic well-being of consumers, prevents the formation of capital, and renders expansion and modernization most difficult. Where would we be today if our forebears had consistently put-sued least urgent wants and neglected to create productive capital?

Many factors enter into the owner’s decision to halt production. He must weigh the anticipated losses from continuing production against the particular losses resulting from shutdown. Valuable fixed assets may be reduced to uselessness, specific tools and equipment to scrap iron, materials and supplies to surplus merchandise to be sold at bargain prices. Labor costs of a shutdown may be staggering as a result of the waste and unproductiveness of labor during the shutdown process, the contractual obligations for pension and severance pay, moving expenses in case some activities and employees are transferred to other company facilities. Undoubtedly there will be legal defense costs from claims and charges lodged by labor, regulators and tax collectors. If all these costs constitute the lesser evil, the owner may choose to close his plant.

The Obligation to Reinvest

Where economic life is free, plants open and close in an unending process of adjustment and readjustment. Ever catering to the wishes and choices of consumers, businessmen make capital investments, change them, withdraw them, or replace them by more productive investments. They respond continually to changes in consumer choices, to changing techniques of production, changing labor costs, environmental costs, government levies, and many other factors that affect productivity. Uninhibited flow of scarce capital from firm to firm, industry to industry, and location to location, leads to highest productivity not only for the owners of capital but also for other people as workers and consumers. Working and living conditions improved when the blacksmith shop gave way to the auto repair shop, and the buggy factory to the auto assembly line.

There is no obligation, economic or moral, to reinvest profits in the plant in which they were earned “so that the workers who earned the profits may benefit from them.” For the blacksmith, to reinvest his dwindling returns in better tools of production would not have altered the outcome. But he could have earned a handsome profit and simultaneously benefited society by investing his funds in automobile production and service. He would not have served the true interests of his workers by keeping them on the payroll. Labor, like capital, is under constant pressure to adjust. It, too, receives its market value and price from the services it renders to consumers who, through buying or abstention from buying, issue the production orders. The worker who quickly learns a new technology, seeks employment in a new industry, or moves to a new location where jobs abound, is rewarded for his effort. The worker who for any reason refuses to adjust to new situations, may cease to serve other people.

Consumers Allocate Returns

It is erroneous to conclude that capitalists owe their profits to the efforts and labors of workingmen, who thereby earn a residual right to profits. Workers have no better claim to the interest earned by capitalists or the profits collected by entrepreneurs than these have valid claims to workers’ wages. Production is cooperation in which each production factor receives income according to the value ascribed to its services by the supreme directors—consumers.

Labor receives its full wages according to inexorable value principles, the providers of capital receive the market rate of interest, and entrepreneurs may earn profits or suffer losses. They all are paid in full. For labor to claim a right to investment capital is to claim the right to command someone’s savings, for the bricklayer who pours the foundation and lays the bricks to claim ownership rights to the house, and the steelworker earning 189 percent of average industrial wages to press his claim to the steel mill. If government were to enforce such claims, there would be few houses and even fewer steel mills.

The notion of workers’ rights to the plant is rooted in popular doctrines of Marx and other socialistic writers. They are making the point that the efforts and labors of workingmen generate a “surplus” over and above the wages they are getting, and that this surplus goes first into profits and other property incomes, then in large part into new investments, increasing the quantity of capital and reducing the demand for labor. To them, unemployment primarily is an investment phenomenon that brings forth a substitution of capital goods for labor. It permits capitalists to exploit labor and invest their felonious gains in ever more capital and power.

There is no need for a detailed refutation of Marxism and other versions of socialism. Other writers have elaborated and articulated the errors in great detail.[6] But it should be pointed out again that workers do not generate surpluses over and above the wages they are getting. They engender no profits. If it were so profitable to be an employer of men, there would be no business failures, no bankruptcies, and above all, no unemployment. Employers would be bidding feverishly for more labor and reaping profits in direct proportion to their payrolls. All such no tions contradict both themselves and economic reality.

Job Rights versus Property Rights

Under the influence of exploitation thought, legislators and regulators have created unchallengeable job rights for organized labor. Roscoe Pound, the eminent legal philosopher and Dean of Harvard School of Law, called them legal immunities and privileges for labor unions, their members and their officials. Organized labor is free to commit wrongs to person and property, and deprive nonmembers of the means of earning a livelihood—things which no one else can do with impunity. It enjoys special privileges as a result of certain features of American labor law, such as the elimination of proven methods of law enforcement, failure to distinguish unlawful action by labor organizations, their leaders and their members, done outside of the employer-employee relation, from practice in that relation, and the practice of committing all matters affecting labor organization to administrative agencies instead of courts of law.[7] The legal privileges and immunities of organized labor clearly reveal great political power that is brought to bear on legislators. This power now is put to use for new favors in the form of plant-closing laws.

Socialist doctrine clothes labor income with the sacrosanctity of “human rights” and vilifies other incomes as the evil effects of “unearned property rights.” The former is said to be anchored in the inalienable right to life and liberty; the latter is said to be a product of convention and tradition, a creature of capitalism. This is why the rights of steelworkers who earn nearly twice the average American industrial income are to take precedence over the rights of stockholders no matter what their earnings should be. This is why a teacher’s claim to income from a few shares of common stock, owned directly or by her pension fund, is to yield to a steelworker’s claim for plant closing benefits.

“Human rights” income is denied not only to owners but also to unorganized labor. After all, the basic method of unionism is restriction of labor competition; the basic effect is unemployment. Union bargaining is collective bargaining by a select group, which means the denial of the right to bargaining by outsiders. Unions claim the right to strike, which is the right to force other people to join the strike. Unions claim “human rights,” which include the privilege to deny “human rights” to others. The fate of excluded people is of no concern to the union. When, despite the legal protection from competition, it finally prices most of its members out of the market, and turns a profitable company into a hopeless undertaking, it calls for plant-closing laws and government bailouts.

Restrictions on Closings Are Restrictions on Openings

There is a striking resemblance between plant-closing laws in the U.S. and “economic development laws” in many undeveloped countries. Foreign governments often welcome the immediate investment of American funds for purposes of productivity and employment, and simultaneously give many reasons for blocking and seizing the funds when the owner seeks to repatriate his property. They construct complex traps for capital and then wonder why, despite all the noisy enticements, little capital is venturing in. Similarly, the sponsors of plant-closing laws are demanding plant investments and reinvestments, but when owners seek to withdraw their funds, or merely liquidate the leftovers, plant-closing laws are to seize their assets and distribute them among the workers. It takes great courage and irrepressible optimism to launch an enterprise in a state with a plant-closing law.

Many entrepreneurs are optimistic by nature, which may lead them to ignore plant-closing laws, refusing to contemplate business failure. In old, established concerns facing minimal danger of closure and liquidation, closure benefits and exactions may indeed be discounted. However, for new enterprises the risk of failure is considerably greater, which makes plant- closing laws especially onerous to them. Where business mortality is high the laws may help to reduce it by discouraging businessmen from even trying. In industries that are subject to great variations in demand or changes in technology, the laws may erect serious obstacles to new in vestment. In unionized industries that are stagnating or contracting, they may render new investment utterly prohibitive. In every case the closure laws reduce the demand for labor and depress wage rates. When organized labor resists the downward pressure it causes mass un employment. In the end, the law that means to prevent unemployment by order of politicians, judges and policemen, actually creates it.

Plant-closing benefits must be viewed as just another brand of fringe benefits that may raise the cost of labor and reduce the demand for labor. To employers, they are just another levy similar to those exacting unemployment compensation, workers’ compensation, Social Security contribution, and all the other mandated exactions. In the long run, they tend to reduce take-home pay by forcing employers to allocate more of a worker’s earnings to his fringe benefits. Take-home pay must fall when fringe benefits rise. But this adjustment process, which takes time, is strenuously resisted by organized labor. It refuses to learn that inability to cover labor costs by labor productivity brings forth more unemployment. It is so difficult to admit that unemployment is a cost phenomenon that purges loss-inflicting labor.

Plant-closing laws give employers a powerful incentive to build plants and facilities in states that do not have closing restrictions. And if companies are located in such states they have an incentive to substitute capital for labor wherever possible, which reduces the demand for particular labor and depresses its wage rates. In situations of wage rigidity and labor resistance it causes unemployment. In the end, economic principle always prevails over the power of legislators, tax collectors and policemen.

Keeping Business in Town

Numerous plant-closing bills are proposing requirements for lengthy prenotification, generous severance pay to workers and confiscatory taxation, called community restitution.[8] They are seeking to keep business in town by rendering closures and departures financially prohibitive. But all the threats of confiscation and restriction imposed on owners cannot make business any more durable.

A business that fails to compete effectively in the production of goods and services is bound to fail in the end. It will fail if it is found wanting in product price or quality and if, for any reason, the costs of production leave no competitive margin of return to the owners of capital. A producer who can pay only $1 per hour for skilled labor is not competitive in the American labor market; a producer who can earn only three percent on equity capital is not competitive in the American capital market. Both are destined to fail in the end. Threats of dire consequences may make them contract or even discontinue all the sooner. Nor can Federal subsidies, grants and loans to workers and communities avert the ultimate consequences of business inability to compete.

Contrary to labor dogma, business profitability provides job protection. The best employer is a profitable employer who plans to expand his operations and needs more labor. To attract qualified labor he must effectively compete not only in wage rates and fringe benefits, but also in working conditions and steadiness of work. He must be more attractive than his competitors.

Employers who for any reason suffer losses cannot offer job protection because their bosses, the consumers, do not grant protection to them. In time, losses tend to consume business capital, give rise to debt, and force business to contract and discharge labor. Alert workers observing the decline and foreseeing the end seek employment elsewhere. They abandon the ship before it runs aground. Other workers with less foresight and mobility may decide to stay to the bitter end. After all, unemployment compensation, severance pay, and other transfer benefits encourage them to wait and see. Plant-closing laws may encourage them to cling to failing employers as long as some assets are left.

In many cases workers are not just innocent bystanders and victims of business failure; they may be active parties and contributors to the dilemma. Acting in unison through a militant union, they may exact maximum pay for minimum work. Organized steel workers receive 189 percent of wages and benefits paid in all manufactures, automobile workers earn 165 percent. They earn these amounts for work performed according to union work rules that reduce effort and output and significantly raise labor cost. And last but not least, union labor usually is angry labor with long lists of grievances. It is hostile labor that is unable and unwilling to compete.[9]

Adjusting Labor Costs

There are countless reasons for business decline and plant closing. But no matter what they should be, workers can nearly always ward off the decline and avert the closing. In many processes of production labor is the most important factor of production inasmuch as its costs exceed all other costs. A small reduction in labor cost may make a plant profitable and competitive again. A steel mill, no matter how old-fashioned its equipment, can be made to be profitable and competitive through a reduction in labor costs. Any automobile plant can be made to function again through savings in labor costs.

It is utterly senseless for any plant to shut down when labor costs are far above the average and union rules remain in effect. And yet, all over the country countless mills, factories and workshops are abandoned with labor costs at their peak. A few concessions and “givebacks” granted in exchange for future claims and favors rarely make a difference. It is sad when great steel cities turn into rust cities with union pay rates and union work rules in full force. It is tragic when jobs are lost forever and plant and mills are razed with labor costs at record levels.

Nearly every plant, mill and workshop could be saved and the disaster of economic loss and unemployment be avoided through improvements in labor productivity and reductions in labor costs. How the American steel industry would prosper again if labor costs were lowered to market productivity levels! How the automobile industry would thrive again if the cost of labor were determined by the free choices of car buyers! Many a plant would become competitive again if only the union work rules would be rescinded and management be permitted to direct labor again. And many a mill could be saved if workers would labor in earnest instead of “spreading the work” or pressing grievances against hapless employers. Rusty mills and abandoned factories would come to life again if organized labor were to acquiesce in the market wage, which is the productivity wage.

Labor unions never relax their pressures for maximum labor cost regardless of the pain inflicted on many workers and investors. They persevere in defense of basic union ideology and their very existence. If they would listen to the warnings of one employer they would have to lis ten to all. If they would relax their grip on one they would have to relax on all. They would be returning to market wages and conditions that are determined by labor productivity rather than union power. By implication they would also be admitting that their own policy of maximum pay for minimum work is an important cause of stagnation and unemployment. But they would rather linger in depression and call for plant-closing laws than to draw this conclusion.

The Cost of Government

Next to the cost of labor is the cost of government as the greatest burden of business. Most corporations pay much more in taxes than they yield in dividends to their owners. In the U.S. they face painful exactions by three levels of taxing authorities: the federal, state and local governments. State and local levies differ greatly depending on the voters’ conception of entitlement and social justice. In some locations they often reach confiscatory levels at which businesses by the score are forced to close their doors; in other states and places where the levies are lower, business may prosper and expand. In international trade and commerce the combined load of federal, state and local levies and regulations may determine the competitiveness of enterprises.

In situations of depression and unemployment, government is akin to organized labor: It refuses to relax its hold on the victims. In fact, state and local authorities usually increase their tax rates when revenue declines for any reason. They remain deaf to the cries of business because they would have to listen to all if they were to listen to one. They keep on taxing, regulating and controlling regardless of the deepening depression around them. Political entitlement and transfer take precedence over any aspect of business.[10] It is sad to observe the decline of commerce and industry with tax rates at record levels. It is tragic to witness the closing of factory gates with tax collectors and union agents arguing over the possession of the gates.

Plant closings always inflict great pain on the participants. Discussion and proposals for relief usually deal with benefits to be exacted from owners, that is, more pain to be inflicted on owners. The noisiest proponents are politicians, tax collectors, and labor leaders. And yet, the more pain they manage to inflict on entrepreneurs and investors, the deeper workers sink into depression and unemployment.

1.   Daniel A. Littman and Myung-Hoon Lee, “Plant Closings and Worker Dislocation,” Richard B. McKenzie, ed., Plant Closings: Public or Private Choices? (Washington, D.C.: Cato Institute, 1984), p. 127.

2.   Ibid., p. 132.

3.   Keinin, Mordechai E., “Wage Competitiveness in the U.S. Auto and Steel Industries,” Contemporary Policy Issues 4 (January 1984), pp. 39-50.

4.   General Motors Annual Report 1983 (Detroit 1984); U.S. Steel Corporation 1983 Annual Report (Pittsburgh 1984).

5.   U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics Bulletin 2175 (December 1983), p. 98.

6.   Two Austrian economists, Eugen von Bohm-Bawerk and Ludwig von Mises, have exploded every aspect of the exploitation doctrine. Bohm demonstrated that it contradicts both itself and the realities of the world. Cf. Capital and Interest, 3 vols. (South Holland, Ill.: Libertarian Press, 1960); Mises penned a comprehensive theoretical and philosophical refutation. Cf. Socialism (New Haven, Conn.: Yale University Press, 1951), also Human Action (New Haven: Yale University Press, 1949).

7.   Roscoe Pound, Legal Immunities of Labor Unions (Washington, D.C.: American Enterprise Association, Inc., 1957).

8.   U.S. Representative William D. Ford, “Statements in Support of the National Employment Priorities Act,” in Plant Closings: Public or Private Choices? ed. Richard B. McKenzie (Washington, D.C.: Cato Institute, 1984), Appendix.

9.   In the steel cities of Western Pennsylvania, Eastern Ohio and West Virginia, where unemployment among steel workers exceeds fifty percent, labor is especially hostile and angry. In Youngstown, Ohio, 989 angry school teachers and other support personnel such as librarians, counselors, and psychologists recently voted for union representation, ninety abstained from voting, and seven voted to remain free. (Youngstown, Ohio: The Vindicator, October 19, 1984), p. 1. What can be expected of working people if their teachers long for and depend on union representation?

10.   Robert M. Bleiberg, “Oh Albany!” Barron’s, December 10, 1984, p. 9.