Twinkies and Labor Unions: Explaining the Hostess Collapse

Oh, those Twinkies. Never mind that the creamy filling is made with a petroleum-based product and can’t be good for your arteries, I’ve loved them all my life. They are a distinctly American food, up there with the Big Mac, a symbol of mass-produced factory comestibles with an infinite shelf life.

Assuredly, the market will fulfill any demand for them that still exists (Little Debbie has had a version out for years), so consumers aren’t likely to miss much. But those BLS unemployment numbers are about to rise by another 18,500 as Hostess liquidates its entire company and sells off its brands in the wake of a failed negotiation with the Bakery and Confectionary Union to avoid bankruptcy.

In a depressed economy, there is inevitably a tension between wages and profits. As profits sink, businesses are forced to contract or file for bankruptcy protection. Naturally, employees resist seeing their wages or benefits slashed, especially after witnessing their CEO get a 300% pay increase to $2.5 million in the case of Hostess. One could hardly blame them.

However, there is a lesson here in depression economics. In his important study Wage Flexibility in the Depression of 1920-21, Brian Caplan used a model of wage adjustments and aggregate supply developed by none other than current Federal Reserve Chairman Ben Bernanke to confirm that wages were more flexible during the 1920 Depression than during the Great Depression a decade later, which saw a massive and prolonged decline in productivity and employment. This “wage flexibility” helped to decrease the severity of the Depression and sped up its recovery.

The 1920 Depression was no picnic either. In some ways, it was much worse. In 1920, prices fell 40% in one year, taking three years to reach the same trough during the Great Depression. Despite the steep drop in prices, employment and output didn’t decline as much. Flexible wages meant that pay more accurately reflected supply and demand for labor, and was able to rise and fall rapidly with economic activity. Inflexible wages, the result of collective bargaining, results in reduced flexibility to adjust to market conditions, and increased unemployment.

Put simply — you are more likely to be able to keep your job if you take a pay or hour cut for a few months. This will prevent you from losing precious hours of productivity looking for a new one and reduce the amount of public largesse you will have to take from to sustain yourself. In turn, this reduces drag on the economy and helps lead to a quicker recovery,as in the case of the 1920 Depression.

This lesson in economics was unfortunately lost on the Bakery and Confectionary Union. the union failed to help an ailing company keep its head above water by agreeing to a relatively minor, temporary decline in wages and benefits. Now, 18,500 people are looking for new jobs as cake bakers and crème-fillers. While the union’s frustration with the company and efforts to maintain standards of living for its employees is understandable, it made a fateful decision that left thousands of people worse off than they should have been.

You can try to defy the free market, but it will always win in the end.