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?


5 thoughts on “Bloated Pensions for All!

  1. Most progressives don’t think the money for increased wages and pensions would come out of profits–they think it, or at least some of it–would come out of compensation for persons higher up the pay scale–thus promoting a narrowing of the wage gap. Generally the highly unionized countries you mention pay their executives and CEOs less.

    BTW, where is the evidence that school choice increases productivity?

  2. Bill – There isn’t much rigorous, cross-national research on the effects of unionization on pay inequality, but the best that I know of is this piece from 1999:
    # Wage-Setting Institutions and Pay Inequality in Advanced Industrial Societies
    # Michael Wallerstein
    # American Journal of Political Science, Vol. 43, No. 3 (Jul., 1999), pp. 649-680
    Wallerstein is definitely sympathetic to the social democratic project btw. He finds that unionization per se does not affect pay inequality. However, centralized wage bargaining does. Again, that’s not something that will ever come to the U.S. Also, I am concerned that if you raised wages for workers on the lower end above marginal productivity and decreased wages for workers on the higher end below marginal productivity, then you encourage higher-than-optimal numbers of people to train for low-productivity jobs and fewer-than-optimal people to train for high-productivity jobs, creating deadweight losses and problems in the long run.

    It seems to me that if you are committed to using government for egalitarian ends, the best means are, again, raising productivity of the least well off, and things on the expenditure side (social welfare programs).

    where is the evidence that school choice increases productivity?

    I think the proof is in the pudding, so to speak. Whenever school choice is available, there are huge waiting lists of families wanting to take advantage. Why do they flock to better schools if given the option? Presumably because their offspring will enjoy better life chances.

  3. As one of these left of the center clueless idiots I’ve a solution: Organize labor unions a’la Germany. The unions are organized along industrial lines. And let unions negotiate wages etc. with employer associations. Once they struck a deal the contract is legally binding for the whole of the industry. By doing so you avoid the fallacy of composition. What might be good for one employer isn’t necessarily good for the whole economy.

    And by the way: It’s always fascinating to read about the outrageous pensions of teachers, police, … What about another group of public workers with even better entitlements? US military? After 20 years service 50% of the last salary for the rest of life plus free health care. Sounds like socialism.

  4. Cohn asks

    “To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous?”

    I believe the problem is that neither Cohn nor Drum manifest any quantitaive capability at all. Not even basic arithmetic. They try to frame a purely quantitative question in emotional, non-quantitative terms like
    “security” “war” “envious” “generous” “stingy” and “stable”.

    A sure sign of a weak argument is one that purports to address a quantitative proposition but does so in an entirely nonquantitative way.

    They should explain how such propositions would be funded and show their quantitative work. All of us would like to see a Nirvana where everyone gets “security”, so no one is opposed to the values in the abstract. The problem is we don’t live in Nirvana and we want to know what the arithmetic is that we must use to cope with the real world.

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