Sickouts at Whose Expense?
by Fred E. Foldvary, Senior EditorMany American Airlines pilots have engaged in a "sickout" despite the order of US District Judge Joe Kendall for them to return to work. Cancellations of about half the flights of the country's second largest airline have disrupted the plans of many travelers in the USA during the Presidents Day (February 15) holiday weekend. The management of American Airlines filed a contempt-of-court motion against the Allied Pilots Association, charging that the union leaders have not taken reasonable steps to end the sickout.
The judge stated that the sickout amounts to a union "shakedown" of American Airlines and that the union may be fined $10 million or more. The judge had ordered the pilots back to work on Wednesday. The pilots' refusal to work was triggered by the company's recent purchase of Reno Air, whose pilots earn less than American's. The AA management wants to raise Reno's pilots wages gradually, while the union wants the higher pay immediately, although the union also wants to put Reno Air's pilots at the bottom of the seniority list. The Reno pilots are not engaged in the sickout.
Judge Kendall said that the pilots' union is responsible for the damages to the passengers, while the union president stated that the union and its officers have not authorized the slowdown or sickout. The cost to the airline is not just the losses of $70 million or more in lost earnings, but the loss of future business and good will as travelers vow not to use that airline again.
This sickout problem extends to many other industries and have become more common. An article on labor in the February 12, 1999 Wall Street Journal, p. B1, states that this tactic is especially favored by government employees such as police and teachers who face legal barriers against strikes. Private-sector employees have also engaged in sickouts as an alternative to illegal strikes.
One way companies can counter a sickout is to require that the "sick" employee be diagnosed by a doctor and have that approved by a company doctor. Employees who are not really sick would then not only lose wages but also have to pay for their share of the loss to the company. So the employers can also be blamed for the loss to the customers for failing to have a policy to check and penalize employees who participate in the sickout.
The effect of such sickouts on the public is what economists call an "external effect" or "externality". The employees impose a cost not just to the shareholders of the corporation, but also to the customers and the public in general by disrupting people's plans and making them waste time and resources. When the employees do not have to compensate these victims, their sickout is in effect forcibly subsidized by the public.
Why should the customers and the public bear this cost? Economic theory implies that it is wasteful, and moral theory implies it is unjust, when the employees impose this cost on the public. If the company and its employees impose such negative external effects, then they should compensate the public. Since both management and workers can be at fault, the general rule could be that half the compensation come from the company and half from the union. The company and the union could then deal with one another to shift the funding, or leave it to the courts.
Having to compensate the victims would make it more costly to have sickouts. Both the management and the union would have an incentive to have policies in place, such as doctor confirmations, to avoid sickouts. In general, making the agent who causes damage responsible for compensation is a sound policy. This needs to be a legal general requirement. Otherwise, sickouts may proliferate and disrupt vital services.
But there is also a more fundamental problem. As the economist and social reformer Henry George recognized, the battle between labor and management is to a large extent caused by government policy failure. By failing to collect the natural source of public revenue, land rent, and instead imposing taxes on wages and capital returns, government lowers the wages received by workers, makes employment more chancy, and reduces employment. This puts labor in a poor bargaining position unless they have a union backed by legislation creating a labor monopoly.
Shifting to rent for public revenue and untaxing wages would shift power back to the individual worker along with a substantial increase in his wage. Wages would rise both due to not being taxed and from the effect of moving the margins of production to much more productive levels, as underused speculative holdings become developed and land is used more efficiently.
So ultimately the public is imposing a big cost on itself by remaining in ignorance and apathy about fundamental economic knowledge. Disruptions from sickouts are a minor cost compared to the immense damage to all workers from the failure to have a sound public finance. So why are the unions not demanding a tax shift from wages to rent?
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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.