From Stephen Williamson (emphasis mine):
One simple way to look at unions comes from Econ 101, where we just apply standard monopoly power arguments. Labor law gives workers the right to effectively act as a monopoly seller of labor. Result? The union drives up wages and extracts rent from the firm. But that argument goes only so far. As long as the firm faces competition, this has to discipline the union. Extract too much rent and you drive the firm out of business.
So what is going on in Wisconsin, Indiana, and Ohio? In general, union organization is not an easy thing in the United States, relative to what happens in other rich countries. Twenty two states, mainly in the south and in the middle of the country have right-to-work laws. In some states, state employees have much less power to form unions relative to what exists in the private sector. However, in Western Europe, unions tend to be relatively powerful. In Canada, labor law is much more conducive to union formation and power. For example, most (if not all) Canadian provinces do not allow the hiring of permanent replacement workers during a strike, and some will not permit the hiring of temporary replacement workers. Strikes of public service workers in Canada are infamous, from old-time disruption in the post office to more recent strikes involving garbage collectors and transit workers in Toronto. The difference in labor laws in Canada and the US is reflected in unionization rates. The US has a unionization rate of only 7% in the private sector, and 29% in the public sector. In Canada, the comparable statistics are 16% in the private sector and 71% in the public sector.
Now, if we believe Scott Walker, the Governor of Wisconsin, public spending in Canada should be wildly out of control. We know, of course, that government is doing much more redistribution in Canada than is the case generally in the United States. But in Canada actual expenditures of all levels of government on goods and services amounted to 21.2% of GDP in Canada in 2009, and 20.6% of GDP in the US. Not much difference there. Further, in spite of union power in the public sector, the Canadian federal government was able to turn around a deficit which had exceeded 5% of GDP in the mid-1990s. Before the recent recession, the Canadian federal government had been running surpluses for several years. We all know how that compares to recent US fiscal performance.
Is Scott Walker likely to save much money by picking on his public sector unions? That’s very doubtful. He’s certainly creating plenty of unproductive conflict. Is what he is doing politically smart? That’s hard to tell. Picking a fight with unions in Madison, Wisconsin may not be the brightest idea. Anyone who has spent time in Madison (4 years for me) knows that there is a large reserve army of people who would enjoy nothing better than spending a couple of weeks camping out in the State Capitol building to bother a Republican Governor. This might play well in the rest of the state, however, where Madison is sometimes viewed as sin city.