Last week House Democrats passed the “Employee Free Choice Act,” a bill which would make it considerably easier for employees to unionize. This week the bill goes to the Senate. Under previous law, employees were required to hold a secret-ballot vote on unionization, supervised by the National Labor Relations Board. However, should the new bill become law, businesses would be forced to recognize a union if and when a majority of workers sign up for one; for example, via petition.
This legislation, a clear attempt to significantly increase the degree of unionization in America, is bad news for shareholders, since unionization is almost always accompanied by lagging profits. Take the highly-unionized Telcom sector, which is dominated by traditional telephone services. As the chart below shows, the Nasdaq Telcom Index has significantly underperformed the S&P 500 through most of its existence.
Conversely, the largely un-unionized financial industry has consistently outperformed the S&P.
I made note of this correlation on the Fox News Channel’s “Cashin’ In” a couple of weeks ago. Host Terry Keenan asked a great question in response: Could this disparity be explained by the age of the sectors? In other words, shouldn’t we expect that the more-mature areas of the economy will lag the less-mature ones?
But on closer inspection, the correlation holds, regardless of the maturity of the sector in question. The financial sector is, after all, older than the S&P itself — by definition. And other mature (and non-unionized) sectors, such as retail, also have fared well.
Put another way: The Employee Free Choice Act is a great idea if you want the entire stock market to perform like General Motors.