Public-sector union growth foretells crises

 

By weathering a housing bubble, a mortgage crisis and an overall financial crisis, our government policy-makers thought that the worst was over. Now comes the threat of still another crisis – one that would engulf the financial well-being of our units of government.

Helping to produce this crisis is the growing power that public-service unions exert on winning continual significant benefits for members. More than a few governmental units are in bankruptcy. The outlook for slowing this trend is not encouraging.

When a union is recognized by the federal government, employers must bargain with it. This mandate becomes the mother of all hot-button labor-relation issues, for it withdraws certain rights and privileges from employers while granting new rights and powers to unions. The basic justification for this shift of power is to correct the alleged “imbalance” of bargaining power between employers and employees.

 

ALTHOUGH IT IS not clear why the power balance should lie on either side, it is difficult to validate the notion that it is in favor of employers. Economists have tried to document this disparity. We are no closer to an agreement on how this might be done than when the process was started. Yet without a quantitative measure of this imbalance, how does one know its size, when it vanishes or when the balance swings to the other side?

We do know if Mr. A has more wealth than Mr. B, he has more alternatives and more choices. He is certainly more comfortable, and better off. Even though the employer has more wealth, we are not clever enough to establish the degree to which he has superior bargaining power. At this stage of our knowledge, only angels can do that.

The wealth relationship, however, between employer Mr. A and his employee Mr. B, is ubiquitous – there are wealth differences among all pairs of people. Does this universal imbalance imply we should regulate all possible dual economic relationships in society? People favoring wealth redistribution would say “of course;” others counsel caution and say, “Wait a minute – we cannot do what only angels can do.”

In granting these significant powers to labor, however, more justification is needed than the mere attempt to correct the alleged, so-far-impossible-to measure “imbalance of power.”

Without union recognition, the employee negotiates for wages, salaries and benefits. In effect, for these items company employees compete against one another. With the formation of a union, however, the employee normally surrenders negotiating rights to a bargaining committee, which is modified somewhat in, for example, contracts among professional sports and entertainment unions. But in its unmodified form, the contract must reduce employee incentives to perform.

This is because rewards for exceptional performance either are diminished or are not available. Worker productivity tends to be adversely affected. Note that many forms of worker incentive contracts were in vogue long before unions were recognized.

Unionization per se does not increase labor productivity; it generates no extra profits to pay higher wages wrung from collective bargaining and coercion. These extra wages must come from employer profits.

The squeeze on profits becomes, in effect, a transfer of wealth from firm to employees. In the long run, employers may attempt to shift the burden of wage increases to consumers and suppliers – a complex, controversial and problematic process. One need go no further than this point to understand why the 1935 Wagner Act’s issues of union power, work rules and benefits have been such contentious issues in labor relations for the past 77 years; why firms’ often bitterly resist union-recognition elections; and why there has been a steady growth of right-to-work states.

 

DO LABOR LEADERS expect firms to attempt to shift higher labor costs to their consumers? Absolutely. This was the foundation, for example, of the successes achieved by post-World War II United Auto Workers’ labor unions.

If management cannot shift negotiated labor costs to consumers, do labor leaders readily accept the outcome that firms might sell assets, might generally disintegrate, or even close? Many do. Consider the recent episode at Hostess. Does public policy encourage these aggressive acts that can lead to such outcomes? Absolutely. By adopting programs including increasing unemployment compensation; stretching the period of eligibility for such compensation; and liberalizing eligibility requirements for worker disability benefits, government spurs labor to act more aggressively.

The position of these unions is even more perverse. (Witness the recent teacher’s strike in Chicago.) Labor’s successes in shifting labor costs forward in the private sector have encouraged it to reach into the huge fertile field of public-service employees. This is an ideal setting for organizing since this union provides an easier vehicle for the forward shifting of labor costs – i.e., to taxpayers.

This ability is enabled by the virtual unbounded taxing power of many taxing authorities, and labor’s growing political power in the administration of government units employing unionized public-service employees. But it is the power to shift costs to taxpayers, which produces visions of sugar plums in the heads of labor leaders.

 

UNION FORMATION per se presents no efficiencies for taxpayers. Benefits won by union members must be borne solely by current and future taxpayers. Nevertheless, organizers look to taxing power as a virtually unending source of future employee benefits, available for the taking through union recognition and subsequent coercion. Further, public bodies tend to provide much less resistance to union demands than private-sector firms do.

It is little wonder that public employees find union preference an easy decision, a preference that is furthered when negotiators representing taxpayers are, themselves, politically aligned with union leaders to varying degrees. These alliances, whether explicit or implicit, complicate the ability of negotiators to honestly represent taxpayers. It remains an awkward, embarrassing situation.

While businesses have a chance of shifting wage costs to customers, in the public-service sphere these costs come out of the hides of taxpayers, who, in contrast, cannot shift them forward and hence have – pun intended – no place to hide.

 

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

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Tue, 12/06/2016 - 23:49

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