Tuesday, February 22, 2011

Of Wisconsin and Public Sector Unions

I had the great fortune to go to both middle school and high school (go Regents!) in Madison, Wisconsin. I say great fortune because at that time Wisconsin has one of the best public school systems in the country, and because Wisconsin is a wonderful state, full of honest, hard-working and unassuming people, and Madison is a great city - it was a great place to grow up.  Now, of course, the state, like many, has to do some belt tightening and the Republican governor is taking the opportunity to knee-cap state public worker unions by attempting to deny them their ability to bargain collectively.

So, the obvious question is, are public sector unions necessary?  How I think about unions starts with labor markets in general.  If labor markets were complete. they would be efficient and unions would not only cause distortions that reduced welfare.  Some believe this to be true, or that at least unions cause more harm through distortions than the good they provide.  It is also true that the efficiency of markets is completely unrelated to distribution and unions are a way in which we, as a society, provide some distributive pressure on the natural outcomes of markets.  We can either do it through unions or through tax and transfer policies - but the latter is generally unpopular.  

To me the fact that labor markets are not efficient is incontrovertible.  Employees face considerable search costs and switching costs.  That is, it is hard and expensive to find jobs and once in a job switching is costly, often involves giving up retirement benefits, etc.  It is also expensive for firms to search, but not nearly as costly, and turnover may cost firms in terms of productivity but allows them to shed higher salaries for lower ones.  I think the social welfare calculus is pretty simple: the imbalance in labor markets creates efficiency losses and unions help to restore the balance.

In the public sector, employees and bureaucracies are often subject to the political cycle and are often targets of budget cutting politicians.  What unions to to benefit all of us is create stability in our public sector that preserves services, promotes productivity enhancing tenure and morale, and helps to ensure that government bureaucracies can compete for the best talent.  The proof that they are not creating more distortions lies is studies that find that, once you control for education and experience, public sector workers earn less than their private sector counterparts.

Unions are not without fault, for sure, no organization is - the internal political economy of teacher unions, for example, causes them to protect underperforming teachers and limit the ability of school systems to distribute teachers most efficiently.  Unions have to be able to change and help find solutions to thinks like underperforming schools. But this does not mean they unions don't play a vital role in the US economy and, most importantly, does not negate the fact that the US is probably better off with unions than without.  

And we should not forget the history of unions, which, during the industrialization of the nation, were able to bargain for a share of the economic rents that the largely oligopolistic firms enjoyed. This created a more just and equitable income distribution and created a consumer class that helped fuel the economic growth of the 20th century.

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