Public Employees, Unions and Fiscal Austerity

With Wisconsin Governor Scott Walker leading the charge, some states are looking for ways to scale back worker pay and curb the collective bargaining rights of public employees. Public sector compensation may be seen as a good place to cut government spending, especially by GOP governors in states where public-employee unions have historically been major contributors to the Democratic party.

I see no strong case for believing that public employees are generally overpaid, if by “overpaid” we mean they receive better compensation than private-sector workers who do the same thing. On average public employees receive better health and retirement benefits than their private-sector counterparts, but they often earn lower money wages than private workers who perform similar jobs. At the bottom of the skill distribution, government employees receive better total compensation, but at the top of the distribution, they typically receive lower compensation than similar private-sector workers.

How do unions hurt employers and help workers?

In the private sector, unions can clearly hurt companies’ bottom lines, especially if the companies compete with non-unionized firms. Contrary to popular belief, however, the presence of a union typically boosts worker productivity. In most industries, unions drive up the cost of paying unskilled and semi-skilled workers. Companies that must pay higher compensation to low- and semi-skilled employees have to come up with ways to make such workers more productive, at least if they want to remain competitive with firms that do not have a unionized workforce. One way to stay competitive is to make workers more productive by using them more effectively or by investing in more costly capital equipment – that is, substituting capital (machines, computers, buildings, etc.) for workers.

Unions give private-sector workers two main benefits. First, in most industries, unionized workers receive a pay- and benefit-premium compared with non-unionized workers in the same industry. This isn’t always true. Sometimes non-unionized firms pay the same wages and fringe benefits as unionized companies in order to discourage their workers from joining a union. Second, unionized workers get a say in determining the structure of their compensation. As a result they tend to get a different kind of compensation package than non-unionized workers in the same industry. Workers covered by a union contract tend to get more generous retirement benefits, for example, bigger pensions and better retiree health benefits. They get stronger, or at least more predictable, job protection. Companies usually find it easier to dismiss non-unionized workers than union workers who are covered by a collective bargaining agreement. Unionized workers also tend to get better health and vacation benefits compared with nonunion workers employed in the same industry. Though it is possible to calculate the financial value of pensions, health benefits, and vacation pay, it’s harder to compute the exact value of the job protection that unions negotiate for their members. (This is one reason that experts can disagree about the relative pay received by government and private-sector workers. Public employees enjoy better job security than workers in the private sector. But how much of a sacrifice in wages and benefits should we expect these employees to accept in exchange for better job security?)

The net gains workers derive from their membership in a union tend to be bigger in the case of workers with no skills or relatively few skills. The net gains are smallest for workers with the most skills, for example, with a college diploma or a post-college degree. At the highest skill levels, the main effect of a union is to change the composition – rather than the net cost – of the compensation package.

What explains the drop in unionization rates?

In 1958 34% of nonfarm wage and salary workers were members of labor unions. The comparable figure in 2010 was just 12%. Part of this trend is due to the drop in the percentage of the workforce employed in private industries where unions were historically strong, notably, in manufacturing. However, a conspicuous trend of the past 40 years has been the decline in unions’ success in organizing workers in new companies and industries. Their lack of success is mainly attributable to nonunionized companies’ greater willingness to spend time, money, and effort to resist union organization campaigns. Under U.S. labor law, employees at a workplace must vote in favor of a union before the employer can be compelled to negotiate with the union. Companies have gotten better at winning these contests. They are hiring consultants and specialized law firms that are increasingly successful at devising ways to defeat unions when they try to organize nonunion workers.

The legal protections provided to workers who campaign for a union are not terribly effective. In proceedings before the National Labor Relations Board (NLRB), a firm with deep pockets and good legal representation can wear down workers and unions who want to organize the company’s workers. Companies that perform prohibited acts in their campaigns to defeat a union often pay only nominal fines long after an offence has occurred. Unions have tried to level the playing field by persuading Congress to ramp up penalties on companies that violate the nation’s labor laws. This effort has been largely unsuccessful. Unions’ lack of success in organizing new workers means they represent a dwindling percentage of the nations’ workforce. Fewer households have any direct connection with a union, and fewer voters see a compelling reason to support union-backed candidates at the ballot box. This reduces the chances unions will win political battles for worker protections.

How much can taxpayers save by cutting public employee compensation?

In the short-run, it is certainly possible to wring cost savings out of the pay and benefits of public employees, including employees covered by a collective bargaining agreement. Many workers in public service have accumulated a great deal of tenure in their jobs. If they quit those jobs, they would suffer major losses in future pension income and retiree health benefits. In other words, many public employees are stuck. Governors and state legislatures can obtain major concessions from immobile workers. However, if their benefits are cut most public employees will think they have received a raw deal from their employer. Government workers who have accepted low public pay in exchange for good retiree health benefits and a generous pension will feel they have made a financial sacrifice in exchange for promised benefits that are now being taken away. They will wonder why they made the sacrifice in money pay. Many public employees will be angry at the unfairness, but comparatively few of them will leave their jobs voluntarily. The promised future benefits they have already accumulated keep them chained to their jobs until they reach retirement age.

This means governments that sharply cut retirement benefits can achieve short-term savings. They may face problems, however, in recruiting young workers in the future. Young people already know they cannot get rich on a teacher’s or a librarian’s or a court clerk’s salary. If public employee retirement benefits are slashed they will also know they cannot make up this loss when they reach retirement age. Under these conditions, why should they go into public service? In the short run, governors and lawmakers can get important budget savings from giving workers a worse deal than public workers received in the recent past. In the long run, far-sighted legislators should worry about how this strategy will affect worker recruitment. I suspect, however, that most lawmakers think that problem will be the responsibility of some future legislature or governor to solve.