Report | Unions and Labor Standards

Business Success and First Contract Arbitration

Issue Brief #275

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First contract arbitration is an important tool to ensure the survival of newly organized unions and the success of new bargaining relationships. But some have worried that first contract arbitration might endanger the survival of businesses—especially small businesses. The real world experience with this tool shows that such worries are unfounded.

Unions provide the best, if not the only advocate for workers on the job site, but fledgling unions will not survive long without a collective bargaining agreement—no matter how many employees voted for representation. Failure to get their first contract signed by an employer in a timely manner is arguably the greatest impediment to the success of a bargaining unit and to workers’ interests being represented in the workplace. Consequently, many feel that the first contract arbitration provision (FCA) is the most important provision in the Employee Free Choice Act (EFCA). The FCA provision would give either the union or the employer the option of entering binding arbitration after 120 days of inconclusive bargaining, including 30 days with help from the Federal Mediation and Conciliation Service.

Business lobbyists and conservatives like Newt Gingrich have tried to scare the American people away from first contract arbitration with the myth that “many businesses would close, millions of jobs would be lost, and unemployment would rise significantly” (Gingrich 2009). The rhetoric is alarming, but the data show that FCA does not drive companies out of business.

This arbitration mechanism already exists in several state laws in the United States and is a feature of Canadian national labor law and the law in eight of Canada’s 11 provinces. Of all Canadian provinces, Manitoba has the arbitration legislation most similar to the FCA provisions in EFCA, where first contract disputes move automatically to arbitration after a set period of time.

A survey of 100% of the private-sector businesses in Manitoba that had a first contract imposed by an arbitrator between 2001 and 2007 reveals that FCA had no effect on business success and survival. Of the 16 Manitoba businesses that had a first collective bargaining agreement imposed by the labor board, 14 or 87.5% were still in operation in 2009 (see Table 1).

[Table 1]

This statistic is instructive first because the sample is so small: in eight years only 16 contract negotiations went to arbitration. This is not uncommon in Canada: the main purpose of FCA is to serve as a deterrent to bargaining in bad faith, and its rare use is proof of its success. Only 1.4% of all collective bargaining agreements with newly certified unions are actually imposed by arbitration. Many negotiations start down the path toward first contract arbitration, but the parties almost always eventually agree to settle their differences on their own terms (Johnson 2008).

Second, the evidence suggests that first contract arbitration has no effect on business success or survival. The 87.5% multi-year survival rate for the small group of businesses that underwent FCA over the course of eight years during a turbulent business cycle is actually better than the 86.2% one-year survival rate of businesses in Canada between 2005 and 2006, near the peak of the business cycle, when survival rates should be highest.1 Despite the small size of the sample, it covers a wide variety of businesses both large and small in many different sectors of the economy. Manitoba’s experience gives no reason for Americans, and particularly small business owners, to fear arbitration. First contract arbitration has not caused businesses to close in Manitoba, and there is no reason to think the results would be any different in the United States.

1. Figure based on small businesses, which comprise 98% of all businesses in Canada (Key Small Business Statistics).

Gingrich, Newt. 2009. “Arbitration the Real Threat in EFCA.” The American Enterprise Institute, 22 April.

Johnson, Susan. 2008. “First Contract Arbitration: Effects on Bargaining and Work Stoppages.”Paper presented at the Labor and Employment Relations Association, January. Available from the author at Department of Economics, Wilfrid Laurier University, Canada.

Key Small Business Statistics. 2009. Industry Canada. Ottawa.