Tuesday, March 1, 2011

Public Unions And Competition

Most people are aware that the Wisconsin Governor has taken on the Wisconsin public unions.  The Governor wants to take away the rights of unions representing government employees to ask for more than the rate of inflation as an increase in salary.  Also, they would have to pay more for their health insurance and more toward their pensions.  Finally, government jobs would no longer be able to force anyone who gets hired to automatically join the union and pay union dues.  The Wisconsin situation raises a whole host of issues and there is a lot of misinformation on both sides.  Let's take a closer look below.

First, let me clarify that I don't think of unions per se as morally good or bad.  I have several relatives that are in unions.  Sure, a union represents the government interfering/making requirments in the employment relationship, but they make a lot of requirements in other aspects (health, insurance, safety, payroll taxes, etc).  You may say that unions artificially raise the price for goods that US consumers buy because they interfere with company's ability to manage costs - but then the minimum wage would seem to do this, too.  I view the US's laws on unions as just a cost of doing business in the US - like complying with other government regulations.  (You might have an opinion on lowering the cost of doing business, but that's another topic and involves a host of other concerns.)

In general, it seems like a union typically increases compensation and provides value to its members - that's its goal and pretty much its sole reason for being.  (Sometimes people point to safety initiatives that were instituted by unions several decades ago, but in the last several decades it seems like union efforts in that regard are insignificant compared to OHSA.)  Unfortunately, that value has to be paid for from somewhere.  Although the specific ratios seem to vary from company to company, it seems like the additional benefits paid to the union members are about 20% paid for by reduction in compensaion/value to management and 80% paid for by the consumer - for example in terms of a price increase.  That's undoubtedly a broad estimate, but it is tough to get reliable data in this emotionally-charged space.
One thing that is interesting for me to note is that the party that typically ends up paying for most of the increased cost of the union (the consumer) is excluded from the negotiation.  I would think that the people that have to pay for most of the cost should have some representation, but that's not really available under current law.  I guess you could argue that the consumer has their representation in that elected officials made the union laws in the first place, but that equates consumers of a specific product with all voters (which may not be the case) and is not very satisfying.

One other thing to note is that unions don't stop trying to get benefits for their members - they typically always want to push the benefits higher.  They don't say "our members are paid enough, we want to be sure that the consumer is not overcharged for our goods."  In this sense, the unions are set up as an unbalanced system - there is no legal structure to restrain the union from ever-increasing compensation and benefits.  You might look to management to do this, but as long as they can structure the deal and shift most of the cost onto the consumer, then they don't really have an incentive to keep the consumer's best interest at heart

However, although there is no legal balance, there is an economic one - the goods made by the company must compete in the open market.  That is, the union can't raise their compensation indefinitely because competition ensures that they will not be able to raise the price of their goods indefinitely.  Let's take a look at the auto industry.  With regard to US auto manufacturers, the auto workers union would negotiate with all of the car manufacturers and give them all approximately the same deal.  For the first several decades, from the point of view of the auto manufacturer management, what do you care how much you have to pay the unions?  You are not going to be at a disadvantage to the other manufacturers, so you can just pass that cost on to the consumer and they can pay for the increased union benefits.

Of course, then you get a foreign manufacturer entering the game and it becomes clear that more than $2,000 of the cost of the union-produced car is consumed by union benefits.  Thus, for cars selling at the same price, you literally get $2,000 more car from the non-union car.  Consequently, consumer sentiment moves (albeit slowly) in that direction and the companies that are providing huge benefits to their unions go bankrupt.  In order to emerge from bankruptcy and be able to compete with non-union manufacturers, the union companies must reduce their benefits to union members in order to be able to compete.  That's pretty much what has happened here.

Thus, you can see that pretty much the only check on the expansion of union benefits is the force of competition.  However, what happens when there is no competition?  When the unionized industry enjoys a monopoly?  In this case, there is no check on the expansion of benefits and consumers have a problem.

I submit that unions for public employees fall in this situation.  There is no effective competition to keep a lid on the expansion of benefits.  Additionally, the "company" (in this case the government) can increase its "income" (in this case taxes), to just about whatever level it likes by unilaterally raising taxes at the espense of the "consumer" (in this case the taxpayer).  This is a dangerous, unbalanced situation.  Consequently, although I am not opposed to the idea of a union in general, I am opposed to unionization for employees in monopoly industries where competition can not effectively balance out the union's goals. 

In the situation in Wisconsin, regardless of what is said in the media, it appears that the governor is limiting his efforts to public unions only - and exempting police.  Consequently, I support his efforts.  Additionally, I think that he should take it further and remove all public unions.

Here are some things to think about:
  • Unionization of state employees has really only been around for about 50 years.
  • About 25% of states already do not allow public employees to unionize
  • Government employees now account for about half of all union members in the US.
  • Studies have found that the average federal employee is paid about 22% more than the private sector when skills, wages, and benefits are taken into account.   The Wisconsin situation may vary, but a similar pattern likely holds.
  • Government unions allow their members to enjoy benefits far in excess of most Americans - like a pension and very cheap health care.  Ain't nobody lining up to give me a pension - how can they feel justified in taking tax dollars from me to pay for theirs?
What do you think?  Should unions for government employees be allowed?  If so, would you impose any restrictions at all?


  1. On the flip side, I would ask why a piddling wage paid to a factory worker is a negative that makes the company less competitive as it raises the cost of the product, but the pay and benefits given to the upper management(which runs into the hundreds of millions) is not considered a negative cost. CostCo manages to do a much better job at compensating its employees than Walmart in terms of salary and benefits. Yet, they are competitive and are a top retail store. The Walton family is sitting upon billions of dollars in wealth. Yet, they would argue that they have to pay their employees a rock bottom salary because they are incapable of generating a profit otherwise!

    Germany is heavily unionized AND is one of the world's top exporters in goods. France is fairly famous for its strikes. Both of those countries have a better overall standard of living, especially for the poor. Over here, there are millions of people who barely have enough to eat. To me, that doesn't sound like a country that is swimming in the excesses of an overpaid workforce.

    Truth be told, the reason why our jobs are going overseas is not because we can't remain competitive by paying a living wage. No. CEOs do it because they are expected to turn out record profits in a short period of time. And they suffer from lemming syndrome even more than a group of first year law students. If they can't be like Apple and innovate and create goods that people are willing to pay some serious cash for, then they go the less creative route and simply lay off people. On the face of it, the company is given the appearance of growing marketshare and success in the design of its products.

    Additionally, retail stores became addicted to cheap imported crap because what they really wanted was an excuse to sell you a credit card. They neither cared about the quality of the item sold. They wanted an excuse to get you through the door and to get you to pay back your purchases at 21% interest(or higher). You can see this attitude in the quality of materials being used in the item. Yes, please go buy a shirt for $3, as the "3" stands for the number of washes that your shirt will withstand before it needs to be retired. You can't blame overpaid workers for the company's choice to trade down in materials. They already moved off shore and are paying workers a fraction of the wages that they made in the US. No. Some bean counter told them that they could increase their profits if they shaved something off of the item.

  2. Hi Chief, Thanks for your comment - I like your blog. You certainly make a good point that the pay to upper management represents a loss to the consumer - a negative cost. Of course, competition acts to keep that pay in check - just like it would preferrably act to keep union pay in check. If what you say is true about CostCo and Walmart, then I salute CostCo from a humanitarian perspective and I am glad of the competition from an economic perspective.
    However, my point is that for a union for a GOVERNMENT - as opposed to a commercial company, there is no competition to keep worker or management pay in check.

    As for Germany, my understanding is that in Germany the banks and government exercise a lot more control over the union bargaining. To a great extent, they actually do what I ask for above - give the consumer an opportunity to participate in the compensation process. This in turn keeps benefit increases more reasonable.

    I also agree with you that a lot of our manufacturing jobs have gone overseas. However, I don't blame the CEOs - instead it is consumer behavior that is the root cause. If consumers always buy the cheapest option, then the product has to be made cheaply in order for the company to survive. That's not some nefarious CEO "raking in the cash" as you seem to want to portray it. Instead, it's mere survival. If the customers stop buying your product - even for only a single quarter - you are out of luck. Consequently, suppliers are just a slave to customer demand.

    I also agree with you that retail stores don't care about the quality of the item sold - instead the store just stocks what people are most likely to buy (which is really as it must be). There is no conspiracy here - the stores just make the most money when they sell things that people want to buy most, and the American people apparently want to buy cheap crap. I don't blame workers and I don't blame the manufacturers or retailers - the consumers have voted with their dollars as to what the products should be and they are getting what their dollars say that want.

    Let's also take a look at how sourcing is done for most major retailers. For example, most of them don't make the products themselves. Instead, they set the complete specifications - which can include number of washes, and even specific cotton and dye types. Various manufacturers then present products for retailer consideration and the retailers usually select the lowest priced few of the manufacturers to provide the goods. (Multiple sourcing keeps the price low through competition.)

    In short, the retailers do their best it identify what the consumers will buy the most of and make it into a specification. The manufacturers then do their best to make it at as low a cost as they can. It's not the manufacturer's choice to move down in materials - nor is it really the retailers - they are just trying to sell people what people will buy the most of.

    For example, Target's profit margin is all of 4.33%
    They need to sell what people are buying a lot of - or they are going to be out of business pretty darn quick.

  3. There's also a good editorial on this in today's
    Chicago Tribune

  4. My thoughts on public sector unions? Generally good.

    The thing about government is that its services tend to be natural monopolies, so the question as I see it boils down to who you want controlling natural monopolies?

    Sometimes privatizing stuff works; sometimes it doesn't. My perception of the American experience is that it doesn't. Costs go up, and the benefits go to a few shareholders who care more about profit rather than citizens/taxpayers who care about control and accountability. Privatized prisons, utilities, military contractors, etc. all require government oversight anyway because government is the consumer. If these were owned by the government, we wouldn't have to worry about contractor oversight, regulatory capture, and other ills.

    By contrast, when the government is thoroughly corrupt as the Japanese government was regarding Japan Railways, then the privatization reduces costs and increases quality. It turned out Japanese politicians getting bullet train stops built in their districts even though they weren't necessary or profitable.

    Therefore, which is worse: the potential for a bunch of working class families getting the benefits I wished I had in the private sector vs. the board of directors of a publicly traded utility supporting politicians who then gut regulations and who overcharge my government for the poor services they provide? I choose the former.

  5. Hi LSTB - thanks for the comment! However, I was not really talking about privatizing the government jobs - just preventing them from unionizing. Privatizing would be a whole different discussion - and I certainly admit that privatizing does not work for everything, as you point out.