In the mid-1930s President Franklin D. Roosevelt signed the Wagner Act that allowed collective bargaining in industry. The forces of the Industrial Revolution and the Great Depression combined to make the working conditions of the average factory employee very difficult.

Safety was an afterthought and wages were tight. If anyone didn’t like it they were free to leave… there would be hundreds more workers, desperate for any job, who would jump at the chance to take a disgruntled worker’s place.

The point of collective bargaining was to give employees a singular voice that carried weight. One worker leaving is trivial, shutting down an entire factory is crippling.

The interesting part of collective bargaining is that it can be a game of brinkmanship. Auto workers pressed for the benefits and pay – which management agreed to – that eventually ended up mortally wounding the U.S. car companies.

The bankruptcies of these companies washed away the contracts and much of the ancillary benefits (like guaranteed employment) that made no sense. The prospect of having no job at all for hundreds of thousands of employees was all too real, and led to an agreement that all parties could abide by.

Now the car companies have much more competitive labor pricing. It’s not perfect, and I might dislike how it came about, but there is no doubt that the U.S. car companies are in better shape today when it comes to labor costs and flexibility than they were before the financial crisis.

And that’s the key… it took a crisis.


While President Roosevelt signed the Wagner Act, he specifically declined to allow civil servants the right to collective bargaining. President Kennedy provided this right in the early 1960s.

Over the past 40 years, private industry unions have shed millions of members as manufacturing employment in the U.S. declined, but public employment unions exploded.

Just as they did in the private sector, these unions pushed for more generous wages, benefits, and employment guarantees. Now cities around the country are facing a series of financial crises of their own, and of their own making.

Over the last several decades cities (and a few states) have agreed to employment contracts and benefits with workers’ unions that threaten to bankrupt them. Detroit is the biggest example of such a disaster, but the city is in no way the only example.

Chicago is not far behind Detroit in terms of owing billions of dollars it can’t possibly pay.

New York has 152 different employee bargaining units that have been operating with expired contracts for six years. The city is only 70% funded in its pensions.

Just as what occurred with the auto industry, cities around the country are headed for their own day of reckoning. This is where the opportunity exists.

One of the outcomes of the financial crisis was laser-like attention to how government, at all levels, spends money. Constituents of every town, no matter what the size, have the ability and the duty to ask their elected officials how money is spent and why it is spent in that way.

Allowing existing employment contracts to drive cities over the fiscal cliff at the expense of all other programs doesn’t make sense for anyone.

While the way Detroit got to bankruptcy isn’t pretty, the city is now at a point where it can define what it wants to look like in the years ahead. This process should include all the parties – taxpayers, business owners, elected officials, municipal workers, etc. – and should start from the point of what is possible tomorrow, not what was on paper yesterday.

If Detroit – or Chicago, or even New York, for that matter – takes the initiative, this could be the start of a public employment evolution in the U.S. where administrators, sanitation workers, policeman, and others return to the same side of the table as the taxpayers.

The goal should be to develop fair pay and benefits for the work performed, while providing the flexibility to deal with the changing economic landscape.

Without such leadership or change, the U.S. will continue to be a nation filled with economic landmines that could explode at any time, taking businesses, vendors, bondholders, current workers and retirees with them.



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Rodney Johnson
Rodney works closely with Harry to study the purchasing power of people as they move through predictable stages of life, how that purchasing power drives our economy and how readers can use this information to invest successfully in the markets. Each month Rodney Johnson works with Harry Dent to uncover the next profitable investment based on demographic and cyclical trends in their flagship newsletter Boom & Bust. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. Along with Boom & Bust, Rodney is also the executive editor of our new service, Fortune Hunter and our Dent Cornerstone Portfolio.