In The Papers: Public Sector Unionism

Eileen Norcross has a working paper out entitled, Public Sector Unionism:  A Review.

In 2009, for the first time, the number of public sector union employees was larger than the number of private sector union employees (1).  Norcross argues that we need to understand private-sector and public-sector unions as two separate phenomena.  Private unions are a “labor cartel within the market economy,” which affects labor supply, prices, and economic growth (1).  They re-distribute earnings within industries, but have no way of forcing revenues up, so they fight over the share of a fixed-sized pie.  In contrast, public unions are a “monopoly provider of labor within a bureaucratic-political realm” (1).  Unlike private-sector unions, public-sector unions have the ability to require people to pay more for their services, and so they (may) control, at least in part, the size of the pie as well as how it will be distributed.

Norcross argues that corporatist policies lead to private-sector union increases (2).  This is why, at the height of American corporatism, more than 30% of workers were in private-sector unions; in contrast, that number is 6.9% as of 2010 (3).  Right-to-work laws undercut the corporatist underpinnings of labor unions and union-heavy states became the rust belt as jobs moved to the south.  “In effect,” writes Norcross, “the laws instituting unionism in the private sector were ‘repealed’ by market forces” (4).

So how about public-sector unions?  Well, if you go back to the Roosevelt administration, you would get warnings that government agents should not be unionized—they understood the fundamental difference between private-sector and public-sector unions.  By the 1950s, though, certain writers believed that public sector unions “would not result in fiscal abuses because the absence of profits in the public sector was ‘compensated by constant pressures for governmental economy'” (4).  Sadly, these people were not invited to write for I Love Lucy, regardless of how funny their claim may be.

As we can see, what really happened is that “local politicians encouraged public sector militancy in order to redirect federal dollars” (11).  An example of this is funding for inner-city schools earmarked for science being converted to increasing teachers’ wages.

In both cases, we see that a union is nothing more than a cartel:  it increases wages for members at the expense of non-members, shareholders, and consumers (11).  What’s different about public-sector unions, as I mentioned above, is that public-sector unions may increase their own demand for labor by electing friendly politicians (12).  These public-sector unions push and push until they bankrupt their localities—“the ultimate check on the growth of public sector unionism is municipal insolvency” (15).  Even then, politicians try to find ways around it:  ” ‘Politicians with short time horizons should be especially willing to pay fringe benefits’ ” (16).  As we have seen, fringe benefits (especially retirement accounts and health benefits) grew significantly faster than wages.

In the economic literature, there are a few theories on how effective public-sector unions are.  Rax and Ichnowski argue that unions are able to increase labor costs, but do not increase general expenditures (17)—in other words, like private-sector unions, public-sector unions still fight over a fixed-sized pie.  Valletta, however, theorizes that unions influence the budgetary process—without corresponding cuts, total municipal spending goes up (17).  But his results show that expenditures do not actually go up.  This does undercut the argument that public-sector unions directly increase government expenditures rather than simply redistributing them.

Perhaps people have maximum acceptable tax rates and politicians try to find ways to get there—that way, politicians maximize their power and influence.