Public-sector union growth foretells crises

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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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Jon Lester
Jon Lester 12/16/12 - 03:23 am
Taxpayers deserve value for money.

Do you really want public sector workers who aren't happy with their lot in life, and who don't take pride in their work?

chascushman 12/16/12 - 09:19 am
Well said Prof.

Very well said

jrbfromga 12/16/12 - 10:11 am
Excellent viewpoint

An excellent summary of the coercive powers of unions. Not to mention that they have become organizations unto themselves, not the benevolent, altruistic workers organizations that they like to portray themselves as. Government organizations, particularly the federal civil service system, already provide little enough incentive for outstanding performance - to add the disincentive of union rules on top of that is a travesty. No wonder we have a hugely bloated federal bureaucracy which seems to accomplish very little in the way of true benefit to the populace.

Bulldog 12/16/12 - 01:01 pm
Public Unions are dangerous

As a taxpayer of long standing, I can tell you that I have about had it with the overspending that goes on locally as well as the state and federal level. We are looking seriously at moving to other areas where the taxpayer is not constantly robbed. Public unions are but just another source of our problems. They need to be outlawed!!!!

Fools_and_sages 12/16/12 - 09:34 pm
Right to work

It is a fact that "right to work" states have higher levels of poverty, poorer infrastructure, poorer educational systems, higher crime rates, higher incarceration rates, higher numbers of people without insurance, and greater wealth disparity between the rich and the poor. "Right to work" simply means the right to have a low wage job without benefits. it applies in the public sector as well as the private.

Georgia and South Carolina are "right to work" states yet we are also well above the national average in unemployment right now. For the private sector, I don't see how "right to work" is really attracting new business or encouraging meaningful five-figure job growth in either state. For the public sector, I don't see how massive lay-offs of state employees and teachers improved government services or education at either the K-12 or college level. In fact, I see people who lost jobs and have no money to spend to stimulate the economy. unions may have prevented such steep austerity measures at the state level and encouraged a quicker economic recovery.

Throughout history, austerity measures have lengthened recessions and lead to depressions in the past. Herbert Hoover proved that in the early 1930s at the onset of the Great Depression and Europe is proving that austerity kills the economy again today.

Furthermore, if unions kill the economy, then states that should have private enterprise unions should also have less unemployment that states that don't have union. However, note that Ohio, which is a heavily unionized state, saw its unemployment rate recover much quicker during this recession. In fact, the US unemployment rate is currently around 7.7% but it is 6.9% in Ohio versus 8.6% in South Carolina and 8.7% in Georgia. So. . .what is the benefit of "right to work" again?

KSL 12/16/12 - 09:53 pm

Spoken like a union member.

harley_52 12/17/12 - 09:11 am
I Love Dr. Beranek's Letters....

....but I wish he had spent a little more time explaining why public sector unions are so much more dangerous than private sector unions. They are for sure.

When the owners of private companies negotiate with unions they are arguing about how to split revenue between owners and labor. Both have some "skin" in the game. Owners have invested their capital and unions have invested their labor. Each has an investment and each deserves a return on that investment. Neither side benefits from demanding a too large a share of the profits that the other side will abandon the enterprise. Both depend on its survival and will either reach an agreement, or the company will fail.

In public sector unions, the owners (taxpayers) are powerless to negotiate. Instead, elected politicians "bargain" with unions to decide how much will be their pay and benefits. These same unions have the power to influence elections and, therefore, the jobs of the elected officials. The elected officials have no "skin" in the game beyond protecting their own jobs. It's a negotiating scheme from hell. Unions and politicians bargain with each other to decide how much of the taxpayer's money they can steal. If politicians attempt to inject some decency and responsibility into the negotiations, unions withdraw their support from their candidacy and/or paralyze the citizenry with disruptions of necessary public services to the citizenry who are helpless to perform these services for themselves.

It is noteworthy that both FDR and George Meany warned us to never allow the formation of public sector unions.

We should have listened and we MUST stop them before they destroy our government and our economy.

That's the plan, you know....

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