Thursday, January 13, 2011

The Coming Battle with Public-Sector Unions

The cover of the January 8-14, 2011 edition of “The Economist” carries the headline “The battle ahead: Confronting the public-sector unions.” The authors correctly point out that most governments face mounting debt problems and commitments to public employees constitute a significant fraction of public expenditures. However, in trying to write a one-size-fits-all article to span the world they end up combining many disparate situations into a single narrative. It is, of course, the conservative, business-oriented narrative.

“Private-sector productivity has soared in the West over the past quarter-century, even in old industries such as steel and carmaking. Companies have achieved this because they have the freedom to manage—to experiment, to expand successful innovations, to close down bad ones, to promote talented people. Across the public sector, unions have fought all this, most cruelly in education. It can be harder to restructure government than business, but even small productivity gains can bring big savings.”
To make everything fit into such a grand summary, one must combine fact with fiction in an appropriate manner. The problems and issues are not as simple as “unions bad,” ‘no unions good.” The lead into the main article does suggest a constructive tone to the considerations which must follow.
“The coming battle should be about delivering better services, not about cutting resources. Focusing on productivity should help politicians redefine the debate.”
The main article cherry-picks examples from multiple countries to illustrate that unions are powerful and members are pampered. The author extracts quotes from disparate sources as to how well life is for the average union member. Many of the comments are directed at the state of affairs in the United States. I cannot speak to other countries, but I can speak to my own.

The author brings up this graphic.

Judging by the title, the author clearly thinks that union membership alone is reason for concern. The public sector and private sector are compared thusly:
“The private sector is dominated by competition and turbulence. Performance-related pay is the norm, and redundancy commonplace. The public sector, by contrast, is a haven of security and stability. Many people have jobs for life and performance measures are rare. The result is a paradox: the typical public worker is better off than the people he is supposed to serve, and the gap has widened significantly over the past decade. In America, pay and benefits have grown twice as fast in the public sector as they have in the private sector.”
Much of the decline in union membership in the private sector corresponds to the Republican-driven goal of destroying the union movement that became so effective during the reign of Ronald Reagan. Since then it has become virtually impossible to get union recognition without the blessing of the employer. Private employers can use techniques of dubious legality that are not available to governments. It is instructive to point out that the decline in union membership in the private sector coincides with the stagnation and then fall in real wages of lower-to-middle class workers. The vaunted productivity gains claimed by the public sector companies owe much to their liberty to cut workers wages at will. It is the task of union representation to keep that from happening. What is good for the company is not necessarily good for the nation.

The author also states that public workers are better off than private workers and pay and benefits have grown twice as fast. That last statement about growth may be true, but consider that pay and benefits growth may in fact be negative in the public sector over the last decade. As for net compensation, the author seems to be terribly confused.
“Evidence from the American Bureau of Labour Statistics support the conservative argument that they have used their power to extract a wage premium: public-sector workers earn, on average, a third more than their private-sector counterparts. Left-leaning economists reply that public-sector workers are, on average, better educated. Whatever the merits of this argument, three things seem clear. Unions have suppressed wage differentials in the public sector. They have extracted excellent benefits for their members. And they have protected underperforming workers from being sacked.”

“Wage differentials are relatively small in the public sector. Lower-level workers, such as secretaries, are usually better paid than their private-sector equivalents, whereas higher-level workers are worse paid.”
Did it not occur to the author that these two paragraphs might be inconsistent? One of the tasks of a union is to make sure that its lowest paid workers earn enough to not starve, and to not have to live under a bridge. There is no such protection in the private sector.

As to the actual levels of compensation, here are the results of a report issued by the Economic Policy Institute (EPI).

Their conclusions:
“Last year, EPI published a paper by Rutgers University professor Jeffrey Keefe, which supplied overwhelming evidence that public-sector workers, on the whole, earn less than those in the private sector.”

“Keefe found that private sector workers earned average annual wages of $55,132, $6,061 greater than the $49,072 earned by public sector workers. When looking at total compensation including employer-provided benefits, this gap narrowed but the private sector workers still earned $2,001 more per year than public sector workers ($71,109 in total compensation, versus $69,108). This gap was especially large among more educated workers.”
So, when it comes to the discussion of public versus private compensation, someone is cooking the books, if not plain lying. Republican presidential candidate (presumed) Mitt Romney has been quoted as saying that “average government workers are now making $30,000 a year more than the average private-sector worker.” So much for honesty in politics!

The real goal will be to break the power of the unions by going after the pension benefits that many public employees possess. These pension commitments are viewed as gold-plated privileges that can no longer be afforded. The question as to their affordability is real; the notion that they are excessive is not. Most of these pension plans are consistent with what was common among private pension plans several decades ago. The real focus should be on why they are not affordable.

Two factors seem to be in play. The first is an apparent short-sighted approach to funding them, or rather, neglecting to fund them out of operating expenses at the necessary rate. Now that budgets very tight there is no way to catch up.

The second factor is the more critical, both for this issue and for the nation as a whole. The future of the nation depends on there being an investment path that can, over the long term, provide a sufficient rate of return that people can supplement their social security income with earnings from investments, pension plans can meet their commitments, and government revenue from taxes on earnings from investments is sufficient to meet the nation’s needs. Now that Social Security payouts will begin coming out of the general fund, even that program depends on investment return.

The stock markets were intended to be that investment path. Pension plans were put in place assuming a 7-8% return. That may appear ridiculous now, but for many years that is what could be anticipated. The markets have been essentially flat over the last ten years. Is that a fluke caused by unusual events, or is this a new normal with which we have to live. With everyone being placed on 401ks now, there is no way they can save enough to maintain a quality life style after retirement without a much higher rate of return.

Public-sector employees have been told for years that low wages will compensated by a healthy benefit package. Let’s not renege on that deal until we better understand our situation. My suggestion is that we figure out how our economy actually works before we begin making changes based on decades of extrapolations into the future. If long-term investing is dead and the only way to make money is by betting on tiny bobbles in asset values then we have much bigger problems than whether public-sector employees are overcompensated or not.

No comments:

Post a Comment

Lets Talk Books And Politics - Blogged