Why Is New York Paying Amazon More Than Virginia?

(Bloomberg Opinion) -- Every once in a while, over the past two years, I’ve exited the subway on my way to work to the sight of an enormous inflatable rat, as big as a float in the Thanksgiving Day parade. The rat stands in front of a 35-story apartment building under construction across the street from Bloomberg’s New York headquarters. It even has a name: “Scabby the Rat.

A “scab,” of course, is pejorative term used by unions to describe people who cross picket lines to take jobs from union members. When you see the rat in front of a construction site, it means that the real estate developer has decided to go “open shop.” That is to say, he or she is not using New York’s once powerful construction trades, but is using non-union labor instead.

Over the last decade, Scabby the Rat has been awfully busy. Although construction unions once had a stronghold on high-rise construction in New York City, that’s not remotely true anymore. Since the financial crisis in 2008, the construction unions have lost half their market share in residential construction; they’re now down to 30 percent of the market. They are losing commercial jobs as well.

Which is why, if you want to understand why New York is giving Amazon.com Inc. $1.5 billion in incentives for its new headquarters, while the other winner, Virginia, is offering only a third that amount, Scabby the Rat is a pretty good place to start.

For as long as anyone can remember, Manhattan has been the most expensive place in the country to build high-rise buildings, almost entirely because the construction unions had a monopoly on the work. A journeyman carpenter in New York makes $50 an hour — with an additional $50 an hour in benefits — and many journeymen are used for jobs that don’t require anywhere near their level of skill. In addition, the work rules have barely changed since the 1930s: Every elevator on the site still has to be manned by an operator; appliances still have to be installed by union workers; and so on. Technological advances have rendered many of these rules pointless, but the unions have resisted anything that might reduce the size of the workforce on a construction site.

The handful of families that ruled over the New York commercial real estate market — among them, the Macklowes, the Dursts and the LeFraks — were fine with this arrangement, in part because it kept the mob away and in part because they were all paying the same rate and none had a cost advantage over the other.

With such a strong grip on Manhattan construction, the unions had enough work that they didn’t bother with the other boroughs. This was a mistake; eventually, as first Brooklyn and then Queens became “hot,” developers began to build high-rise residential buildings there, using non-union contractors. The Manhattan developers eventually realized that their outer borough brethren were saving tens of millions of dollars.

Soon enough, the Manhattan developers also began using non-union contractors, tentatively and quietly at first, then frequently and openly. In 2015, a young developer named Michael Stern began building a complex, 1,400-foot-high residential skyscraper — the kind where apartments can go for $30 million or more — using a combination of union and non-union labor. This was the kind of project that had always been reserved for unions because of their supposedly superior skills. But Stern was not only going “open shop,” he was crowing about it. The building, 111 West 57th Street, was said to cost $750 million. Had it been built solely by the unions, its likely cost would have approached $1 billion.

There are measures the unions could have taken to win back market share: agree to cut out work rules that no longer made sense, allow certain jobs to be done by lower-paid workers, pare back the extraordinary benefits package. But the unions did none of those things. Instead, with the backing of New York Governor Andrew Cuomo, they went to the legislature seeking some changes in the law that would have forced union-scale wages on certain non-union projects. Although they got some of what they wanted, it didn’t do anything to roll back the tide. Quite the contrary.

Which brings us back to Amazon. At the news conference announcing Amazon’s decision to locate in Queens, New York Mayor Bill de Blasio said, “You’re going to see union jobs in construction.” A press release issued by Cuomo actually quoted Gary LaBarbera, the head of the Building and Construction Trades Council. “We look forward to working closely with Amazon and the community to ensure that the project includes good middle-class construction jobs with benefits.”

As the union critic E.J. McMahon noted recently in the New York Post, there is nothing in the agreement between New York and Amazon that calls for the company to use union labor to build its new headquarters. Indeed, given chief executive Jeff Bezos’s libertarian bent, and Amazon’s tendency to use technology to keep costs down, it seems likely that it wouldn’t use the construction unions.

But it was quite clear from the remarks of the mayor and the governor that the unions are going to get this job. In other words, no longer able to compete in the marketplace, the construction unions are using their political allies to land a big job they would probably not get otherwise. In effect, Amazon is being used as a pass-through to send $1 billion in tax dollars to the construction unions.

A final point: As I’ve written before, I strongly believe that the decline of unions has played a big role in the scourge of income inequality. But that decline wasn’t caused only by rapacious capitalists or anti-union politicians. Far too often, unions have shot themselves in the foot, by refusing to abandon outmoded work rules, or to roll back gold-plated benefits that caused their products to be uncompetitive.

When liberals bemoan the sorry state of unions, they tend to forget the unions’ own sins. Amazon notwithstanding, the construction unions of New York are giving us all a sad reminder of how unions lose clout — and work.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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