Bloated Pensions for All!

The left-of-center commentariat has been doing their level best to provide some kind of defense of the recent explosion in public sector pay and pensions [1] [2]. In the process, they don’t do much to dispel the common impression of progressives as being clueless on economics. At TNR, Jonathan Cohn writes:

To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy? I would suggest it’s more the latter than the former… In the long term…, it seems like we should be looking for ways make sure that all workers have a decent living and a stable retirement, rather than taking away the security that some, albeit too few, have already.

At Mother Jones, Kevin Drum endorses private-sector unionization as the solution to the problem:

So now it’s going to be a war of taxpayers against unionized public employees. It won’t be hard, especially in lousy economic times, to convince envious clerks and factory workers that these guys need to be brought down a peg or two. It’s just human nature. But wouldn’t it be better if all these envious clerks and factory workers were instead asking why their pay and benefits haven’t kept up with overall economic growth — which, after all, is all that public sector workers have accomplished? I don’t know what the future of unions is in America, but for now they’re really the only ones who are asking that question and putting some muscle behind it. Until someone else starts doing a better job of it, we still need them.

So let’s say that these commentators get their wish, and through “card check” or some other policy the government manages to increase private sector unionization significantly, meaning that a larger percentage of the work force is covered by collective bargaining agreements. I agree that it is likely that these agreements will include more generous wages and benefits for the workers covered by them.

But where does the money come from? Do progressives think that unionization causes the rate of profit in the economy to fall, redistributing wealth from investors to workers? Because that’s just not right. If you force businesses to pay above-market wages, they hire fewer workers. You get structural unemployment, which disproportionately harms the poorest and most vulnerable. Young people find it harder to acquire skills that will allow them to increase their own productivity, because they find it hard to find jobs in the first place. Eventually, economy-wide productivity declines, ultimately leaving everyone poorer.

Now, in “corporatist” countries that have comprehensive labor unions that essentially represent the country’s entire labor market, such as Sweden, the unions “internalize” to some degree the costs of unemployment and moderate their wage demands, thus vitiating both the costs and benefits of unionization relative to a competitive job market. Labor centralization is not going to happen in the U.S., but even if it did, it wouldn’t increase wages and benefits across the board, because a comprehensive labor union acts more or less as if it were trying to replicate a competitive job market – just with less flexibility and dynamism. And increasingly, even these corporatist countries are facing higher long-term unemployment, as collective bargaining agreements that comprehensively set wages throughout the economy turn out to do a mediocre job of matching wages and marginal productivity.

Given a distribution of marginal productivities in the workforce, there’s literally nothing government can do to reduce inequality in market wages. If the government administratively sets wages for the entire economy, there would not only result the irrationalities attendant upon central planning, but in addition any attempt to reduce the market income of capital will reduce investment, either through outsourcing or through the withholding of investment in favor of consumption. Less investment means lower labor productivity, which means less wealth for everyone in the long run.

The only way to reduce market inequalities through public policy is to adopt reforms that increase the productivity of the least well off. The sooner progressives face this fact, the better off we’ll all be. School choice, anyone?