DANIEL DISALVO ASSISTANT PROFESSOR OF POLITICAL SCIENCE THE CITY COLLEGE OF NEW YORK-CUNY MANHATTAN INSTITUTE SENIOR FELLOW A Case for Public Sector Labor Reform

First Things First To avoid confusion, let’s take a few specious claims off the table:  Claim #1: There is a correlation between public employee union strength and greater state budget deficits during the Great Recession.  Claim #2: Collective bargaining in government is the only cause of state and local pension problems.  Claim #3: Collective bargaining is unresponsive to budgetary problems. All of these claims are false.

The Public Sector Difference Public and private sector workers share the union label. They are thus of the same genus. However, unions representing government workers are really a different species than those found in the private economy. The two species of unions have different histories and the political and economic case for each is quite distinct.

The Public Sector Difference Market forces provide a natural check or limit on the demands of private sector unions. In contrast, because government is the monopoly provider of many services, such as education and security, such market counter-pressure is limited or non-existent. Theoretically, then, we should expect public sector union demands to be less attuned to cost, productivity, and efficiency.

The Public Sector Difference Both private and public sector unions engage in collective bargaining. However, using the political process, they can exert far greater influence over their members’ employers — that is, government — than private- sector unions can. They get two bites at the apple, so to speak.

The Public Sector Difference Unlike private sector unions, those in the public sector have two goals: 1. Greater salaries, benefits, and protections for their existing members. 2. To hire more workers and increase their membership ranks. As economist Richard Freeman (1986) has written, “public sector unions can be viewed as using their political power to raise demand for public services, as well as using their bargaining power to fight for higher wages.”

The Public Sector Difference The goal of increasing pay can be in tension with the incentive to expand public employment. For example, teacher pay has not increased that dramatically over the last few decades because the number of teachers being hired has increased and the student-teacher ratio has fallen. If fewer teachers had been hired, salaries could be greater.

Political Activity and Collective Bargaining The economic and policy literature shows that public sector unions influence public policy and government spending. Political activity may be even more effective than collective bargaining in securing increased wages, benefits, and higher levels of employment and spending.

The Political Advantages of Public Sector Unions Four key advantages public sector unions enjoy over private sector unions and other interest groups: 1. Public sector unions have automatic access to politicians through the collective-bargaining process, while other interest groups must fight for such entree. 2. Government unions can more easily mobilize their members for electoral participation than other interest groups can. 3. Government solves the collective action problem for the unions with agency chop provisions, which inflate and stabilize their membership. 4. Most interest groups must devote a great deal of time and effort to fundraising. Public-sector unions, on the other hand, enjoy a steady, reliable revenue stream, as union dues are deducted directly from members’ paychecks.

Fiscal Burden of Government Unions States with strong public employee unions tend to have greater debt, higher interest rates on their bonds, and spend more. Freeman (2011) finds that public sector unions are associated with greater public debt/GDP and lower bond ratings. Note: higher debt may be positive if it reflects good public investments but lower bond ratings are not good by any standard.

Fiscal Burden of Government Unions Most economists agree that government unions increase the cost of government. Between 2000 and 2008, Bluestone (2010) found that the price of state and local public services has increased by 41% nationally, compared with 27% for private services. O’Neil and McMahon (2007) found that New York’s state and local government payrolls have grown by 53 percent, adding 472,000 jobs since the enactment of the Taylor law in 1967, The private sector added 1.3 million jobs, a growth rate of only 23 percent.

Fiscal Burden of Government Unions Hoxby (1996) shows that collective bargaining in school districts leads to increases in total spending, teacher salaries, and the total number of teachers. In sum, the unions use their power to extract more money and jobs at higher cost to school districts and states.

Fiscal Burdens of Government Unions Most of the economic literature finds that unions in government increase their members wages compared to non-union workers. Note: this wage effect has been found to be slightly smaller than union in the private sector. States with strong unions also tend to have larger pension and health commitments to their employees.

Fiscal Burden of Government Unions Where an agency shop is permitted or compulsory, Farber (2005) finds that government union workers’ earnings are 10 percent higher. Zax and Ichniowski (1988) find that cities with bargaining units representing police, fire, sanitation, and street workers spend more on these activities than do cities that do not bargain with unions. Valletta (1989) finds that the presence of collective bargaining agreements increase municipal employment by 20 percent.

Democracy and Unionism in the Public Sector The oldest critique of public sector unionism is that it compromises the sovereignty of democratic government and distorts the democratic process. Unionized government is a questionable constitutional delegation of power to unelected union officials insofar as they share with the elected representatives of the people the power to determine the day-to-day activities and compensation levels of public servants.

The Redirection of Policy Priorities Unions demand for expansion of public sector labor may not lead to increases in total public employment but may inflate unionized sectors, while shrinking those without unions. In such cases, government priorities are redirected in ways that the public or even elected officials may not approve.

The Redirection of Policy Priorities Freeman and Valletta (1988) find that collective bargaining laws produce higher wages for covered and non-covered workers, but they are also associated with lower employment in departments that lack collective bargaining contracts. Zax and Ichniowski (1989) also find that unions are able to raise the wages of employees in other departments but this comes at the expense of decreased employment outside of their own bargaining units. O’Brien (1994) finds that unions increase department spending through political activity and not through the collective bargaining process. The increases department spending come through higher employment, not higher compensation.

Two Worlds of Work The private sector is dominated by competition and turbulence. Performance-related pay is the norm, and redundancy commonplace. The public sector, by contrast, is an island of security and stability. Many people have jobs for life and performance measures are rare.  The public sector labor market lacks attributes on the demand side (profit-motivated aversion to excess costs, full discretion in hiring, firing, and wage setting, etc.) that would generate adequate compensation levels.

Comparable Worth: A Tortured Subject There is an extensive debate over whether government workers are better compensated than their private sector counterparts. Even after one controls for the unique characteristics of the government labor force (age, education, experience, region, etc.), some analysts find a public sector premium but others don’t. This debate is largely over how to value job security and benefits (pensions and healthcare) in the econometric models. All told, the weight of the scholarly evidence tilts in the direction of a wage premium in the public sector.

Wage Compression in the Public Sector Unions help suppress wage differentials in the public sector, which bring the high and low end of the wage scale closer together. Wage compression means those at the top end of the labor market (accountants, economists, lawyers) make less compared to their private sector counterparts, while those at the low end (secretaries, janitors, bus drivers) make more.

Warping the Government Workforce With poor prospects in the ultra-competitive private sector, government work is increasingly desirable for those with limited skills. At the opposite end of the spectrum, the wage compression imposed by unions and civil-service rules makes government employment less attractive to those whose abilities are in high demand. According to Donahue (2008) and Borjas (2003), there is a “brain drain” at the top end of the government work force, as many of the country's most talented people opt for jobs in the private sector where they can be richly rewarded for their skills.

Unions and Government Productivity Union negotiated work rules render government less efficient and less innovative than it otherwise might be. Management in many jurisdictions has been, effectively, emasculated. The unions have protected underperforming workers from being disciplined, reassigned, or dismissed. Over the long term, work rules negotiated in collective bargaining can drive public policy in directions that neither elected officials nor voters desire.

Unions and Productivity Moe (2009) found that the more restrictive (rule bound), a teachers’ contract, the lower the gains in student achievement. Hoxby (1996) has shown that teacher unionization explains why schools can have greater inputs but worse student performance. Hanushek (2010) argues that replacing the bottom 5-8% of American teachers with merely average instructors would catapult the United States to the top of the international educational rankings.

Politics of Blocking As is often the case in American politics, public sector unions’ political power rarely leads them to get everything they want. Rather, their power is more likely to show up in blocking efforts to innovate in the way government delivers services that might weaken job protections for some workers. For instance, public employee unions are often the biggest obstacles to performance pay and efforts to reform unsustainable pension and healthcare plans in government.

Political Alliances The close alliance between public sector unions and the Democratic Party invites attacks from Republicans. It also makes the Democratic Party more “conservative” insofar as its alliance with the unions often leads them to defend the status quo of government operations. Hence there has been much recent conflict between Democratic governors and mayors and public employee unions.

Political Alliances According to the Center for Responsive Politics, six of the top fifteen biggest donors to federal political campaigns from 1989 to 2012 were government workers unions or unions with large number of public employees. Note: most public sector unions represent state and local workers and most policies affecting them are made by state and local government, not Congress. The twelve largest unions (public and private) have spent $384 million on federal political campaigns over the last 20 years. While only 3% of that money has gone to Republicans, 40% of union members vote for the GOP.

Political Alliances Top 15 Political Donors, RankOrganizationAmount%Dem%Rep 1ActBlue$55,745, AT&T$47,571, AFSCME$46,167, National Association of Realtors$40,718, SEIU$37,634, NEA$37,051, Goldman Sachs$35,790, American Association for Justice$34,715, International Brotherhood of Electrical Workers$34,292, Laborer's Union$31,876, AFT$31,681, Carpenters & Jointers Union$30,769, Communications Workers of America$30,192, CitiGroup$28,842, American medical Association$27,880,93549 * Public employee unions or unions with substantial numbers of public employees in their ranks are in bold. Source: Center for Responsive Politics

Political Alliances The partisanship of union contributions helps explain Democrats big advantage over Republicans in contributions from the biggest donors to federal elections: $1.3 billion to $844 million over the last 20 years.

Political Alliances

State and Local Powerhouses The political influence of public-sector unions is probably greatest in low-turnout elections to school boards and state and local offices, and in votes to decide ballot initiatives and referenda. Their influence is greatest in these situations because of informational and mobilizational asymmetries (i.e. the unions care intensely about some things, while voters knowledge and interests are more diffuse). They consistently support positions that would lead to higher taxation and greater government spending.

Conclusion Civil service laws and collective bargaining were implement to depoliticize public employees. However, consequent unionization has had to effect of re-politicizing public workers.

Conclusion Public-sector unions distort the labor market, weaken public finances, and diminish the responsiveness of government and the quality of public services. Many of the concerns that initially led policymakers to oppose unionization of the government workforce have, over the years, been vindicated.