Public Sector Unions: U.S, Canada Compared

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.

Origins of the Public Employee Pension “Crisis”

What’s an “unfunded pension liability”?

As part of the efforts of conservatives who are desperate to cut government spending (particularly on any kind of employee or social benefit spending), we are being treated to an unending drumbeat of “unfunded pension liabilities” are killing state and local government budgets.  Since it’s all couched in accountant-type talk and delivered with serious faces and ominous tones, the message received by people is it must be because public employees are being compensated with overly-rich pension schemes.  Usually there are a few anecdotes about some police officer, teacher, or city official somewhere that’s retired with a six-digit annual pension.  Of course, the fact that a few anecdotes don’t establish anything when we’re dealing with millions of workers doesn’t stop the media.  Scare tactics make good politics and TV.

So let’s blow away some of the fog about “unfunded pension liabilities” and public employees.  First, the concept of “unfunded liabilities” is a very, very murky, fuzzy area.  The way a pension plan works (an old-fashioned defined-benefit plan) is that in the present the employer makes a promise to the worker to pay a pension of a certain fixed amount in the future when the worker retires.  Let’s say the worker is making $50,000 a year now and the pension promise is to pay $20,000 per year in 20 years (these numbers are much more common than the inflated 6-digit anecdotes talk-radio hosts cite as “proof”).  The employer is obligated by accounting rules to both pay cash right now for the salary to the worker and to also make payments right now into a fund (the pension fund) which is invested.  Then in 20 years when the employee retires, the pension fund pays the money back to the employee by paying the $20,000 pension each year.  The trick is in the “investment” part. The employer only needs to put just enough into the pension fund now so that when the money sits there for 20 years accumulating interest and dividends there will be enough in the fund to pay the pension for the worker’s remaining life after retirement. We want to know if the employer is putting enough into the pension fund now and whether or not the pension fund has enough money in it now.  “Enough” all depends on things that will happen in the future, and the future, of course is unknowable. But we can make assumptions about it.  The critical missing pieces of information are:  What rate of return or interest rate will the invested pension fund earn from now until the employee retires? How many years will be until the employee retires? and How many years will the employee live after they start receiving the pension.  If you know these things, then the rest is just math.  But we can’t know this stuff for sure.  We have to make assumptions.

If we make these assumptions on future rate of return and life of the worker then we can determine if the fund has enough in it right now that will grow to be enough in the future. If the amount in the fund is greater than what we calculate/assume will be needed, then it is overfunded.  If  the fund actually has less in it right now than we estimate it should to pay the promised benefit in the future, then we call the difference between the actual and the projected “ought to have” is called an unfunded liability. Technically, even if the pension fund is underfunded at the time the worker retires, there is still no problem as long as the employer is able to make up the difference so that the worker gets the full pension that they were promised (and gave good labor for years earlier).

The existence of an unfunded pension liability is a very serious issue for a private business or corporation. The reason is because a private corporation stands an high chance of not even existing when it comes time to pay the pension. To make it worse, without rules that limit how much unfunded pension liability a private company can have, an incentive exists for the private business to intentionally defraud the worker.  They could make promises now, receive labor in return now, and then never deliver the payment for that labor in the form of the pension.  Even with rules against unfunded pension liabilities there are still large numbers of firms that go bankrupt and default on their pension obligations and stick the federal government with the bill (see Pension Benefit Guaranty Corp.). When the entity in question is a goverment, the seriousness of an unfunded pension liability is lessened, although not entirely absent.  This is because the government entity is much, much less likely to disappear or not be able to raise funds in the future – they have the power to tax.  And, just how many government entities, states or cities, have disappeared in our history – pretty close to none.

But the state and local government “unfunded pension liability” boogie man is even less threatening than it has been made out to be.  The really, really scary numbers are largely the result of the assumptions made.  As it turns out the nature of compound interest means that even very, very small differences in assumptions (future investment rate of return, lifespan of retirees) will change the unfunded pension liability estimate dramatically.  Further, what’s a “realistic” assumption of rate of return is strongly influenced by stock market crashes.  So for example, many state and local governments (and many private companies also) actually had fully-funded pension funds in 2007. But then the financial world world collapsed due to the unregulated speculation of the big banks.  Those pension funds lost literally billions and billions (some estimate in the trillions) of dollars worth of investments in the crash.  Rate of return likewise dropped as The Federal Reserve has kept interest rates very low.  So now the new “realistic” assumptions on those funds future performance make them look like they are seriously unfunded.

Dean Baker at Center for Economic and Policy Research has a new paper out available that explains the crisis isn’t what it’s made out to be and that the cause is most certainly not “overly generous pensions for public employees”.  The primary cause is the financial collapse created by Wall Street and our government’s inept and failed attempts to fully stimulate the economy back to recovery.  The abstract:

There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred.

This paper shows:

  • Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009.
  • The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing.
  • The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable.

Report – PDFpdf_small | Flashpdf_small

Observations on Wisconsin

I’m noticing that the media is being somewhat slow to pickup on the real story happening in Wisconsin and not spreading to Indiana and Ohio. It’s not about fixing state deficits or finances. It’s about busting unions, pure and simple.  As such, it’s part of an long-term effort that the right wing of American politics has been pursuing since the late 1960’s to increase the share of GDP that goes to profits and elite investors and to reduce the share of GDP/national income that goes to the middle class/working class.

Steven Pearlstein of the Washington Post is starting to get it, though:

The last time any elected leader made such a direct and brazen attack on the legitimacy of the union movement was when Ronald Reagan risked havoc in the skies by firing hundreds of striking air-traffic controllers and preventing them from ever getting their jobs back. This dramatic bit of union-busting became a turning point from which organized labor never really recovered – and, like the Wisconsin imbroglio, skillfully played off resentment of public employees whose pay and benefits exceed that of the average taxpayer.

But rather than playing Reagan to Wisconsin’s truant teachers, Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor’s fortunes

Pearlstein also observes how all the conservative talk about “running government like a business” is pure nonsense.  No sane business leader interested in building a long-term successful business would approach workers this way, something I can attest to from my own corporate and consulting experiences:

Back when I was working at Inc. magazine in the mid-1980s, we loved nothing better when approaching a public-sector issue than to ask how the private sector would handle it. Faced with the situation in Wisconsin, we would have called up Tom Peters or Peter Drucker and posed the example of a new chief executive brought in by the shareholders (i.e., the voters) to rescue a company suffering from operating losses (budget deficit) and declining sales (jobs). Invariably, they would have recommended sitting down with employees, explaining the short-and long-term economic challenges and working with them to improve productivity and product quality in a way that benefits both shareholders and employees.

Now compare that with how Wisconsin’s new chief executive handled the situation: Impose an across-the-board pay cut and tell employees neither they nor their representative will ever again have a say in how things will be run or get a pay raise in excess of inflation. A great way to start things off with the staff, don’t you think? Remember that the next time you hear some Republican bellyaching at the Rotary lunch about why government should be run more like a business.

This situation, both the efforts to bust the unions and the protests, which started in Wisconsin but has spread will, I think be a major turning point in U.S. political economy.  It’s too early to tell if which way things turn.  It could spell a determined u-turn back to the early 20th century and worse working conditions and wages share of GDP/GNI, or it could be the beginning of the reversal of the 1970’s-1980 conservative revolution (is that an oxymoron?)  and a return to progressive values.  Too early to tell.


More On Wisconsin

So we’ve already established that Wisconsin Gov. Scott Walker is not trying to balance the budget or otherwise “fix” a deficit (see yesterday’s post).  In fact, the bill itself is going to result in more funding problems, not less.  Menzie Chinn shows us:

Another interesting implication for Wisconsin is that the transit systems would lose approximately $45 million in funds from the Federal government under Governor Walker’s bill. From “Walker proposal could result in $7.1 million cut in federal aid to Madison Metro Transit,” Wisconsin State Journal:

The state received $73.9 million in federal transit funding in 2010, including $22.5 million for the Milwaukee area and the $7.1 million for Madison, according to the memo.

About $27.3 million for the Milwaukee area likely would not be affected because Milwaukee County has a contract with a private corporation to run its transit services, the memo says.

But the remaining $46.6 million, including the funds for Madison, “could potentially be withheld” due to the governor’s proposal, it says.

This is because:

…federal law requires continuation of collective bargaining rights on wages, pensions, working conditions and other conditions to get federal transit money, according to a Legislative Fiscal Bureau memo.

The article observes “[t]he Walker administration did not respond to a phone call and e-mail.” regarding this issue.

Empirical question of the day: who [which income decile] relies the most on city bus systems in Wisconsin?

The bill stripping public employee unions of collective bargaining rights is a pure political power grab instead.  But now we learn that the bill itself isn’t based on some sort of reasoning that opposes theses unions on principle.  Instead, the bill appears to be pure and simple power pay-back at political opponents. It seems the bill exempts four particular public employee unions – the exact public employee unions that endorsed Scott Walker.  As church lady might say, Isn’t that special! How conveeenient!  From the WISC-TV newsite in Madison, Wisconsin:

Walker’s bill would strip state and local government employees, including teachers, custodians and game wardens, of their ability to collectively bargain everything except their wages.

But the measure carves out a special exemption for local police officers, firefighters and the Wisconsin State Patrol.

Critics said the move amounts to political payback for unions that support Walker and could create a schism between government workers.

During his campaign for governor, Walker was endorsed by the Wisconsin State Troopers, as well as the Milwaukee Police and Firefighters associations and the West Allis Professional Police.

In all, five public employee unions endorsed Walker, and four of the five are completely unharmed by Walker’s budget repair bill, WISC-TV reported. Walker has denied that the unions are getting political payback.

Apparently Governor Walker’s favoritism to unions who supported him isn’t being accepted very well. From the same article:

The executive board president of the Wisconsin Law Enforcement Association has issued a statement on the organization’s website expressing regret for the endorsement of Gov. Scott Walker in the governor’s race.

In a post dated Feb. 16, Tracy Fuller writes, “I am going to make an effort to speak for myself, and every member of the Wisconsin State Patrol when I say this … I specifically regret the endorsement of the Wisconsin Trooper’s Association for Gov. Scott Walker. I regret the governor’s decision to ‘endorse’ the troopers and inspectors of the Wisconsin State Patrol. I regret being the recipient of any of the perceived benefits provided by the governor’s anointing. I think everyone’s job and career is just as significant as the others. Everyone’s family is just as valuable as mine or any other persons, especially mine. Everyone’s needs are just as valuable. We are all great people!!” The full statement can be found at The executive board president of the Wisconsin Law Enforcement Association has issued a statement on the organization’s website expressing regret for the endorsement of Gov. Scott Walker in the governor’s race.

In a post dated Feb. 16, Tracy Fuller writes, “I am going to make an effort to speak for myself, and every member of the Wisconsin State Patrol when I say this … I specifically regret the endorsement of the Wisconsin Trooper’s Association for Gov. Scott Walker. I regret the governor’s decision to ‘endorse’ the troopers and inspectors of the Wisconsin State Patrol. I regret being the recipient of any of the perceived benefits provided by the governor’s anointing. I think everyone’s job and career is just as significant as the others. Everyone’s family is just as valuable as mine or any other persons, especially mine. Everyone’s needs are just as valuable. We are all great people!!” The full statement can be found at

So who’s really behind Governor Walker and his move to destroy collective bargaining for all but the those who support right-wing, Republican causes?  The Koch Brothers.  The same folks who supported the Tea Party movement with behind-the-scenes money. The same folks who funded opposition to healthcare. The same folks who own and make Georgia-Pacific paper products (might want to consider that on your next shopping trip).  From Mother Jones (and many other sources):

Wisconsin Republican Governor Scott Walker, whose bill to kill collective bargaining rights for public-sector unions has caused an uproar among state employees, might not be where he is today without the Koch brothers. Charles and David Koch are conservative titans of industry who have infamously used their vast wealth to undermine President Obama and fight legislation they detest, such as the cap-and-trade climate bill, the health care reform act, and the economic stimulus package. For years, the billionaires have made extensive political donations to Republican candidates across the country and have provided millions of dollars to astroturf right-wing organizations. Koch Industries’ political action committee has doled out more than $2.6 million to candidates. And one prominent beneficiary of the Koch brothers’ largess is Scott Walker.

According to Wisconsin campaign finance filings, Walker’s gubernatorial campaign received $43,000 from the Koch Industries PAC during the 2010 election. That donation was his campaign’s second-highest, behind $43,125 in contributions from housing and realtor groups in Wisconsin. The Koch’s PAC also helped Walker via a familiar and much-used politicial maneuver designed to allow donors to skirt campaign finance limits. The PAC gave $1 million to the Republican Governors Association, which in turn spent $65,000 on independent expenditures to support Walker. The RGA also spent a whopping $3.4 million on TV ads and mailers attacking Walker’s opponent, Milwaukee Mayor Tom Barrett. Walker ended up beating Barrett by 5 points. The Koch money, no doubt, helped greatly.

The Kochs also assisted Walker’s current GOP allies in the fight against the public-sector unions. Last year, Republicans took control of the both houses of the Wisconsin state legislature, which has made Walker’s assault on these unions possible. And according to data from the Wisconsin Democracy Campaign, the Koch Industries PAC spent $6,500 in support of 16 Wisconsin Republican state legislative candidates, who each won his or her election.

It is important to note that the Koch Brothers are not just funding their favorite candidate as an expression of their voting preferences. They are also using their large wealth in deceptive and sophisticated ways to get around legal limits on campaign contributions. Those limits exist so that everybody has at least some of a fair shot at influencing politics. Note too, the Koch Brothers fund a lot “astroturf” organizations – organizations that are named so as to appear nice-and-who-could-be-opposed, but in reality are trying to do things only in the interests of a few folks who know that truth and transparency would be fatal to their cause.  So why are the Koch Brothers funding Scott Walker and a lot of other right-wing conservatives and astroturf organizations? It’s about oligarchy. It’s about power for the rich and more profits. Which means in the end it’s about crushing the middle class. But I’ll tackle that subject in the next post here.

On Wisconsin

For those who are unaware, street protests have come to Wisconsin. Literally tens of thousands (a local Fox news affiliate admitted they numbered at least 70,000 on Saturday) for what is now at least 4 consecutive days of protests in Madison, Milwaukee, and other cities.  The issue that has brought them out is a proposal that recently elected Republican governor Scott Walker made and looked ready to jam through the Wisconsin legislature (Republican majority) without hearings was allegedly a deficit-reduction budget bill.  But the bill contained provisions to outlaw or severely curtail the rights of public employees to collective bargaining. It is an interesting situation. 52 years ago, in 1959, Wisconsin became the first state to allow unionization and collective bargaining by state and local employees. Now the governor wants to lead (?) by abolishing it.  For more on the protests in general see most any major news outlet.  Here are two reports: ABC News and CNN. This is a significant issue and possible turning point in American political economy.  The proposals to end public employee collective bargaining and the protests are spreading to other states such as Ohio, Indiana, Tennessee, and Nevada.

Most of the national news coverage is taking the governor’s claims at face value. In particular the assertion that the state faces a severe deficit, that public employees are “overpaid” and have too-rich benefits, that the only way to balance the budget is to cut benefits, and that only by ending collective bargaining can that happen.  As usual, the news media have failed.  The facts are otherwise.  I turn to Menzie Chinn, one of the country’s premier econometricians, who happens to be on the scene (he teaches at Univ Wisconsin Madison) for a few of his recent dispatches from the front.

First up, the governor had carefully planned this.  Including alerting the National Guard well over a week ago:

From The Isthmus:

The Wisconsin National Guard has not been activated but it is on alert.

“Plan for the worst, expect the best,” Gov. Scott Walker explained to a jam-packed press conference this morning in the State Capitol.

It was the official roll-out of his broad rollback of collective bargaining rights for unionized government employees, part of his budget repair bill, seeking to resolve a $150 million shortfall in the next five months.

Walker said he was well aware that “some union leaders will try to incite their members.”

Next, the governor and Republicans (and Fox news) are repeating ad nauseum the assertion that public workers, both in Wisconsin and in general, are overpaid and overcompensated when compared to the private sector.  The only studies I’ve seen that draw that conclusion are studies that compared the compensation per job of college-educated full-time public employees to non-educated part-time private sector employees.  Menzie Chinn (he is an econometrician) crunches the numbers and finds public workers are lower paid than comparable private sector employees:

Using the March 2010 CPS data, regression analysis controlling demographic characteristics (full-time, education, years of economic experience, gender, race, citizenship, and organizational size) confirms that total hourly compensation for Wisconsin public sector workers is 4.8% lower than for private sector (-5.1% for Wisconsin State workers, and -4.7% for local government). The differentials are bigger for annual compensation. These estimated differentials are statistically significant, as shown in Table 4. (graphs and tables at the link)

On Friday, the unions called the governor’s bluff.  They proposed to accept the benefit cuts (the financial part) if the governor would give up on the ending collective bargaining. Again Menzie reports:

From Milwaukee Sentinel Journal:

…The Walker statement was in response to a statement earlier Saturday from [State senator] Erpenbach, who said he had been informed that all state and local public employee unions had agreed to the financial aspects of Walker’s budget-repair bill. Erpenbach added in his statement that the groups wanted, in turn, for Walker to agree to let labor groups bargain collectively, as they do now.

Since collective bargaining rights do not in themselves have direct budgetary implications, then it is unclear — from a fiscal perspective — why agreement can not be made.

Local Fox news affiliate estimates the anti-bill crowd at 70,000, and tea party supporters of the governor’s bill in the hundreds.

If the governor has rejected this proposal, then it is clearly NOT about the money or the alleged deficit.  It is about power and breaking unions. It is interesting then that the governor, whose real intent is now clear (break the unions) did not try to propose and argue a change in collective bargaining on any merits of it’s own. Instead, he claimed it was necessary because of money, not because he wanted to argue the inherent rightness or desirability of ending collective bargaining. It is not surprising then that we find that even the claim of deficit and the necessity of trimming state spending was false.  In fact, while Wisconsin faces some deficit – with 9% national unemployment, all levels of government are short of revenue, it was in relatively good shape until Scott Walker came into office as governor in January.  Among Walker and his legislature’s first actions in January were to make the deficit worse by giving tax breaks to special corporate interests. The Cap Times reports how “Walker gins up crisis to reward his cronies”.  It turns out that the $137 million deficit Walker claims is the reason for breaking the unions, is actually the result of the $140 million dollar special interest tax breaks bill passed by Walker and his Republicans. As recently as January 31, the state of Wisconsin was forecasted to end the year with a surplus, not a deficit.

How this all turns out will, I think, have significant repercussions beyond Wisconsin.  The governor of Wisconsin has even managed to anger the Super-bowl champion Green Bay Packers.  I don’t think that’s a good move in the cheese state.