Public Union Wage Fix

Another day, another budget battle between public unions and newly elected officials over how to address states’ deficits and debts. Ohio is now about to follow Wisconsin’s lead in requiring its public unions to contribute more toward their own benefits and in limiting their legal rights to bargain collectively.

An Ohio firefighter said that his the bill will cut his family’s income by 10%, adding that he has stopped contributing to his son’s college savings to pay his monthly bills. Though regrettable, this strikes me as perfectly natural, and indeed necessary. Resources are scarce, so all of us must make difficult choices about how to allocate them. And usually when resources are devoted to one use, they cannot be devoted to others. That means that we all face tough choices all the time. Part of becoming an adult is facing this reality and dealing with it prudently.

When others have been subsidizing one’s living, however, it means that one’s pool of available resources is, though still limited, artificially expanded. That means that one has not been exposed to the full costs of one’s decisions about how to allocate. If the time should then come—as it has in Wisconsin, in Ohio, in New Jersey, in New York, in California, and soon in other states across the nation—when the third-party subsidies of one’s standard of living are reduced, one is forced to make new decisions on how to allocate one’s remaining resources. The pool is reduced, and that means that some of the things on which one formerly spent one’s resources will have to be foregone. That new reality is reflected in the Ohio firefighter’s laments.

What is important to keep in mind, however, is that these reductions, though painful, are not penalizing. That is, they do not constitute a penalty that is being imposed on the firefighters or other public sector union members. Instead, they are reflections of the reduced ability of the state to pay. If the reduction in my own income—and my income has gone down this year due to increased health care costs—means that I do not go to my local coffee shop or out to dinner as often as I used to, that does constitute a marginal reduction in revenue for the shop or diner, but it is no penalty to them. Although they might have hoped for my continued business, they had no reasonable expectation of it, and so cannot reasonably demand it or claim injustice.

By contrast, the public sector workers negotiated contracts that do stipulate certain wage, benefit, and bargaining conditions; those contracts gave rise to reasonable expectations, which are now being threatened or removed. So I think they have far more justification for complaint. Not getting something one hoped for is disappointing; not getting something one expected, and something to which one is (was) contractually entitled, is frustrating and infuriating. 

The generous benefits and wages contractually negotiated with public sector unions were indeed too generous and thus should never have been made. I do not blame the workers for getting whatever they could—who among us would turn down a raise?—but the politicians making those promises were obligating other people, including future generations, to pay for them, and thus they had no moral right to do that.  We are left, then, with a real difficulty: public-sector workers who have legitimate, because promised, expectations of high wages and generous benefits, and an economic reality that those promises cannot be kept.

What should we do? The economic reality leaves us, unfortunately, with no real option. The promises will have to be broken. Though it will be little consolation to the affected public-sector workers, those promises should never have been made. The people who made them were either crooks or ignoramuses or both; they include both the politicians and the labor leaders, both of whom should have known better. Let us hope they are held accountable.

In the meantime, however, I have a proposal to make to help alleviate the difficulties public-sector workers will face as they recalibrate their lives in accordance with their new economic realities: Start a charitable Gap Fund for Public Workers. Solicit private, voluntary donations to help fill the gap between what these workers expected to have and what they will in fact have. I see no political or strategic reason (from the public-sector workers’ perspective) not to do this, and by making it voluntary it will not further indebt or obligate people who had no say in creating their expectations. It will also offer a way of measuring actual public sentiment in favor of the workers, as opposed to rising sympathetic poll numbers, which reflect only costless verbal solidarity and thus are not as indicative of real sentiment.

It is a regrettable, unfortunate situation for the public-sector workers. They have been betrayed by all the people who pretended to protect and represent them. Perhaps they, like investors in Bernard L. Madoff Securites LLC, should have mistrusted the lavish promises, but still the promises were made. A charitable Gap Fund will not give them everything they were promised, but it might be a way to mitigate some of the temporary hardship, while at the same time softening some of the opposition they are facing and even generating.

21 thoughts on “Public Union Wage Fix

  1. James, it’s wonderful to note how sympathetic you are.

    You say:

    > When others have been subsidizing one’s living, however, it means that one’s pool
    > of available resources is, though still limited, artificially expanded.

    But how do you know that it isn’t:

    > When others arbitrarily reduce one’s living, however, it means that one’s pool
    > of available resources is more limited, though for no good reason

    The market exists to do price discovery. What is happening isn’t moving closer to a market, just to a new artificial price. Your lack of acknowledgement of this just makes you sound like a fatuous fool.

    1. Just an Australian: Markets do not exist to do price discovery. That happens in markets, but markets exist because people have a natural inclination to truck, barter, and exchange, and thus will do so when allowed. Prices can emerge in ways other than through markets; for example, if I offer my house for sale at $1 million, that is a price (even if no one will likely pay it). So there is a degree to which all prices are artificial. It is just that some prices will clear, and other prices are relatively closer to or further from clearing. When third parties interpose to set prices further from likely clearing points—whether above or below—then one has the phenomenon I was addressing. Because in the particular case under discussion the prices were being set above, not below, the clearing points, that is what I discussed.

      My “lack of acknowledgement of” the logical possibility that prices could also be below the clearing point, therefore, was because it was irrelevant to the point I was making. Presumably there are indefinitely many other irrelevant things I did not mention as well.

      So from the cover of anonymity you call me a “fatuous fool” for not having mentioned an irrelevant point? Perhaps you directed that epithet at the wrong object.

      1. > Because in the particular case under discussion the prices were being set
        > above, not below, the clearing points, that is what I discussed.

        uh? And that is known because?

        I do not think that this is irrelevant. Your whole argument is predicated on that claim – but you don’t support the claim. Nor is it obvious to me that any particular arbitrary price point is closer to the clearing points

        I’m not so sure that I misspoke about markets. Certainly price discovery is not their primary immediate purpose (you’re right about that), but taking a longer view from history, I suspect that price discovery grows in importance – why politicians are forced to tolerate free markets.

  2. Given that public employees have only one possibility in terms of potential employers — i.e., the government — and given that this labour market will therefore follow the supply/demand model of a monopoly (which isn’t necessarily an appropriate/’just’ mode allocating wages) how is it that you can determine union workers’ prior rate of pay as “too generous”? If, for instance, there were multiple potential employers for a firefighter then it would be rational to assume that their wages would rise beyond that of the monopoly rate of pay that the government is obligated to. There are some very important reasons why certain services such as firefighting belong to the public sector, mostly because of the inherently shared risk that lack of protection on the part of the individual would lend itself to. But if there is no union to barter wages with the single employer, who does?

    And if, as I suspect may be the case, the justification is that the public needs to “become adults” and take responsibility for their own actions (i.e., vote in raises for public sector employees to ensure high service standards), then how are they justified in lower the wages of teachers, who’s service is essentially not to the voting population but to future generations? The people held accountable in this case are those who will eventually become adults and have to take responsibility for a decision that they did not make — meanwhile, the former adults who voted in the low wages of teacher will benefit from a lower rate of taxation. This is, in my opinion, inherently unjust.

    I am certainly no proponent of unions within competitive markets, but I do not understand your jump to the public sector. You seem very confident in asserting an ‘unjust’ rate of pay in here on the basis of a private model’s assumptions, which are, in your example absent. If you could take the time to go over that process with us it’d be appreciated, thanks!

  3. I am self employed. My income rises and falls. I have operated a total of three businesses in my life; the first sold for a profit, the second abandoned, leaving me indebted and the third is currently, tenuously providing a living. I make my choices. I live and learn from them. I have never felt that I deserved any special priviledges from my successes or sympathy for my failures.

    Why does the perception exists that there is a class of people that would consider themselves immune to financial heartbreak or disaster. I take issue with this statement:

    “By contrast, the public sector workers negotiated contracts that do stipulate certain wage, benefit, and bargaining conditions; those contracts gave rise to reasonable expectations, which are now being threatened or removed. So I think they have far more justification for complaint”.

    If a public sector worker was promised x and x could not be delivered, my attitude is, so what. Why should there be a class of people who would be immune to the vagaries of the market and the greater economy. Sometimes when make a deal, it falls through. People welch on contracts and get welched on all the time. You can take your licks and move on; or you have the courts at your disposal. Why should public sector workers not be subject to the same vagaries as the rest of us? Especially, given that the rest of us are providing their pay.

    1. Public sector employees do not follow the same demand and supply model of production that free markets do. They rely on the government for employment. That would be the equivalent to your company only having a single buyer, who sets the price for your product/service. That’s called a monopoly, and it usually sucks.

      In the private sector when you “make a deal” and it “falls through” you can, as long as it was a legally bound contract, take that jerk to court and receive compensation for breach of contract. That’s one of the reasons America is the best place in the world to do business. That why it is still the #1 place for any investor in the world to put their money. That’s why it’s the richest country on Earth. If by “fall through” you mean there weren’t very profitable returns on a certain investment of yours and you went bankrupt, well, yeah. Life’s tough sometimes.

      But in the public sector, if you make a deal and it falls through, that jerk who screwed you is the government. They write the rules, and they probably have better lawyers than you do. That’s basically why the complaint of public employees regarding the termination of their contract is justified. Plus now, without a union, how do they individually pay for lawyers to defend their contracts?

  4. “But in the public sector, if you make a deal and it falls through, that jerk who screwed you is the government.” As I said, you can take your licks and move on; or you have the courts at your disposal. If a law has been broken or they suffered a tort they can sue. People sue the government all the time.

    My question is why the sympathy? Why do public sector workers get a pass? If public sector workers get screwed they garner no more sympathy from me than when a private sector worker gets screwed. In fact, they get less sympathy because I am coerced into paying for public sector workers whether I like their service or not, whether I want their service or not.

  5. Some people are sympathetic towards the public sector workers in this case because the story behind their circumstances IS different than that of individuals working within a competitive market.

    I guess what I was trying to get at in the above comments was that in a perfectly competitive market resources are allocated in a perfectly efficient way (where supply meets demand). The public sector does not operate this way, however, as the only buyer of this service is the government — this equals: a monopoly market. In a monopoly market there are is still price-setting going on, but, rather than at the most efficient point, the buyer sets the price of the service at the lowest possible point, which is to some people unfair, and to others (me) merely inefficient.

    Here’s the hypothetical we started with… Firefighters are employed by one institution: the government.

    (The reason for this is that it is more INefficient to privatize the firefighter service: imagine having to pay them for their services each and every time you use them. The individual operations costs on the individual would be unbearable, potentially bankrupting otherwise productive members of society due to mere ‘accidents’. The other issue is coverage: private groups strive to maximize profit and minimize loss — therefore, would it be efficient for a firefighting company to set up shop in an area in which most people couldn’t afford their services anyways? You want to see those people DIE? Plus, fires tend to spread — someone just lets their house burn cause they can’t afford the service, and then it spreads to your house…who’s fault is that? It is simply easier to cover everyone, and have everyone chip in. This is, in fact, the premise upon which insurance companies work, but only in a COMPETITIVE MARKET.)

    Now, let’s say that the government wants to lower taxes to increase their political capital. Lowering taxes means sacrificing (OFTEN wasteful, yes) public spending. But the firefighting portion of the budget is pretty big. Slice. The candidate then gets reelected for cutting taxes. The firefighters take a cut in pay. The game repeats itself over and over until, guess what? No one wants to be a firefighter (and those left to do it are probably incompetent). Go live in Mexico for a while and see how much you enjoy the police force. Corruption in that instance is due to incredibly low wages.

    As far as I understand (and I’m still learning, which is why I asked Otteson to explain his reasoning), the only way to prevent politicians from singling out segments of the public sector and cutting them (which translates into tax cuts) in order to maintain political power is to allow employees such as firefighters to barter with the government via unions. Yes, this will create inefficiencies (higher paid firefighters), but the trade-off is good service (or at least better than if they were paid shit and nobody did the job [well]).

    So why be sympathetic? I guess in my case it’s actually more just a matter of self-interest. Many public sector services are still public because it’s more efficient to run things in those particular industries in a centralized manner. Essentially, society pays LESS than it would for the service had that service been provided in a private market.

    IN THE CASE that a given public service would operate more efficiently were it privatized, then privatize it. Teachers, policemen, firefighters…I’m not convinced. US Postal Service…ok THAT one you can kill, haha.

  6. Australian: I base my claim on what their counterparts in the private sector make, which is typically below what the public-sector workers make.

  7. I will get off my soap box about sympathy for the beleaguered municipal workers and relate something anecdotal about this statement:

    “Yes, this will create inefficiencies (higher paid firefighters), but the trade-off is good service (or at least better than if they were paid shit and nobody did the job [well]). ”

    The insurance industry measures the effectiveness of municipal response by a Property Protection Class(PPC) rating. If you know your PPC you have a pretty good measure of how good your responders, expecially fire responders are. You can find out your town’s PPC by asking your insurance agent. The PPC is a huge factor in your home insurance rates. The scoring system runs from one, the very best response to ten, the worst. Your house would have a ten if you lived out in the boonies without a fire dept or fire hydrant nearby. PPC is a very good proxy for how good your responders are. You could use it to compare union responders to non-union responders.

    I live in Texas and out of the thousands of communities here, very few score a one. Houston is the only big city with a one. Big cities with a two are Austin, Dallas and El Paso. Two indicates a pretty good response time and a high degree of competence. Big cities with a three are Fort Worth and San Antonio. A reasonably competent professional fire department should score the community at least a three. Most small towns run a four to seven, if you live in the boonies eight to ten.

    My own community is served by the Pasadena Volunteer Fire Dept. Pasadena is the largest city in the USA with a volunteer fire department. It serves about 150,000 residents in an urban and industrial setting. Pasadena firemen are literally “not paid shit” but the PPC rating for Pasadena is TWO. Pasadena scores higher than the professional responders in San Antonio and Fort Worth. Only one point lower than the pros in Houston next door.

  8. So the moral of the story is that volunteer fire fighting services are better than public ones? I mean…talking about the dangers of free-loading… Besides, there ARE still public providers that are rating as good or better than yours (you said so yourself: Housten, with Ft. Worth and San Antonio not too far behind).

    Anyways, not all communities can get dedicated volunteers. Why don’t those communities scoring lower than Pasadena ditch the public option and start their own volunteer force? I’m sure their fellow taxpayers wouldn’t complain.

    It seems to me that relying on volunteers as a more general policy might just create more freeloader problems than it actually solves. Pay usually correlates to productive capacity, that’s a pretty well established model.

  9. No, I was addressing the statement that a union shop will deliver better service than a non-union shop and to a lesser extent the notion that higher wage rates will deliver a more competent fire department. That isn’t necessarily true.

    PPC ratings provide a ready way to compare union fireman with non-union fireman and pros with volunteers.

    I wanted to address another statement you made about firefighters: “imagine having to pay them for their services each and every time you use them. ” Actually, in most municipalities across the USA you do get a bill from the fire department each and every time you use them. Your homeowners policy will cover that exclusive of the deductible.

  10. If you’re not suggesting a broader policy of public reliance on volunteer firefighters then you’re right, it’s not necessarily true. It’s just a general model often used to describe the flow of talent. Some firefighters will be just as productive no matter how little you pay them, seeing as they’re saving lives and property (which would ironically mean that they’re in that line of work because of their EMPATHETIC attitude towards other human beings, rather then any sort of monetary compensation). One possible long-run externality of low pay ‘could’ be, however, that talented people with other employment options start to go where they’ll be better compensated — this is what happened to the in the Mexican police force (in addition to an increased likelihood of accepting bribes).

    If you’re still being billed for a ‘public’ service such as firefighting then the cost of that service has been subsidized by definition. The bill would be much higher without the aid of government dollars, and you’d need the budget of a fire department to estimate how high that might be (remember, you wouldn’t be merely compensating them for driving over to your place — a privately run fire department has operational costs that would need to be paid for by individual consumers). If the bill is from the volunteer force then that cost is not compensating the firefighters for their labour (which comes back to the paragraph above).

    Also note that non-union firefighters also benefit wage-wise from a union because the union increases labour market competition, i.e., to keep people OFF the union the employer increases their wages. The employer would have no incentive to do this without the union, and the non-union wages would likewise fall.

  11. It’s been shown empirically that union shops depress wages in the non-union shops adjacent to them. Austrian economists have demonstrated deductively why that is true as well.

    I disagree with your assertion about Mexican police as well as the assertion that low pay leads to corruption: “One possible long-run externality of low pay ‘could’ be, however, that talented people with other employment options start to go where they’ll be better compensated — this is what happened to the in the Mexican police force (in addition to an increased likelihood of accepting bribes). ” While certainly people will seek a higher paying job if they are able, it doesn’t follow that they will resort to crime or corruption if they can’t.

    But then there’s Mexico.

    I grew up on the border. The police in Mexico and in nearly every other part of government have always been corrupt and always accepted bribes. It’s part of the culture and has nothing to do with the pay. If you work in the police or government in Mexico and don’t accept bribes and otherwise play along then you won’t be trusted and won’t be promoted. Worse still, bad things might start to happen to you.

  12. Ok, I do agree with your (perhaps over-)generalization that corruption is a part of the culture of Mexican governmental institutions.

    On the other hand, desperation does in fact make it easier to buy people off, simply because the risk involved decreases — you have alternatives to working as a cop, so if you get caught breaking the rules: so what? You get another job. There’s less incentive to do your job properly.

    More likely than not, this particular instance of corruption is a result of a combination of the two factors. The fact that police are more corrupt along the border would lend support to my hypothesis, however, as this is where money flows in and out (esp. drug $), thus improving upon the cash-corruption correlation. You would think that if it had nothing to do with money than they would be just as corrupt in Guadalajara as they are in Tijuana, which is, anecdotally (as you seem to see that as legitimate), not at all the case.

    Re: union workers. Just to be clear: We are referring to individual PUBLIC firms WITHIN WHICH there are BOTH union AND non-union employees. I am well aware that union labour sinks productivity in competitive markets. If this is what your oh-so-beloved Austrian school has “deductively” proven, then please share the link to the publication, or post the title, author and publisher. Sounds interesting.

  13. The standard deductive argument is: union wages are obtained through coercion/collective bargaining, non-union shops are not subject to such coercion and will not pay union rates if they don’t have to. Conversely, if non-union shops were willing to pay union wages, we wouldn’t need unions or collective bargaining/coercion in the first place.

  14. So without collective bargaining, everybody’s wages still fall. Ok. Back the real issue here: they are going to fall lower than they would in a competitive market, because they work in a monopoly market. Because equilibrium within a competitive market represents the most efficient allocation of resources, wages fall below efficiency levels. Therefore, in aggregate, society is worse off.

    While unions might pay above the labour market equilibrium, I would rather pay extra (via taxes) than risk worse firefighter service due to insufficient compensation for their labour.

    1. You miss a critical long-run component which is that, as average wage rates fall, the purchasing power of a unit of currency rises. It’s the quantity theory. As the supply of dollars decreases, nominal bidding for goods and services decreases, which leads to overall falling prices and thus an increase in the purchasing power of the monetary unit. This rise in the value of money increases the real wages of workers, perhaps even enough to offset any nominal decreases.

      As labor prices continue to fall, the market can allocate scarce resources to other functions, increasing overall productivity and thereby increasing the purchasing power of money even further.

      But if some members of society receive wages above what the market would otherwise pay them, their increased supply of cash and their resultant increase in purchases of goods and services on the open market drives market prices up. This is not a big deal for them, because they have more money, but for non-union workers, the fall in the purchasing power of their salaries is a de-facto reduction in salary. Therefore, in the long run, any artificial (i.e. non-market) increase in nominal wage rates for some people will, ceteris paribus, be balanced by a decrease in real wage rates for others.

      The problem of monopoly (or, more properly for this instance, monopsony) is purely a government creation. There of no reason why the government should need to monopolize the industry. I would gladly pay a fixed annual fee for a fire-fighting company. Such an arrangement is not entirely unheard of either- there are a few localities that have subscription-based fire departments. The problem is that private competitors are currently squeezed out because the government is essentially operating for free (i.e. no additional marginal cost).

      Lastly, there’s no way you can quantitatively measure the impact of nominal wage increases on the efficacy of an individual firefighter. Without knowing the exact effects of such an increase, however, it would be impossible to know when the marginal cost of raising his wages would exceed the marginal benefit from his increased morale (i.e. to find the point at which the value of his increased productivity no longer exceeds or is exactly equal to the cost of acquiring it). Absent any reliable way of judging the efficacy of varying degrees of such an action, one would be forced to establish policy based on a complete guess, or choose one of two extremes- either granting every requested increase or denying same. Of course, all three such options are completely unacceptable as arbitrary and unaccountable, and are the predictable results of government intervention in the free market which might otherwise establish a price based on individuals’ subjective valuations of firefighting services that would take into account, as in the case of any other sort of labor, the effect that increasing or decreasing wages has on productivity.

    1. I agree. But good luck trying to convince the government to become less powerful. The one thing Republicans and Democrats have in common is a blind devotion to government “solutions”. Democrats want to spend more and Republicans want to spend less, but at the end of the day they both want to expand the scope of government.

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