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?