Bargained into a collective corner

Bargained into a collective corner
By Paul Jacob
2/27/2011

It’s not just Wisconsin. Or California. (Or Ohio. Or Illinois.)

State and local governments around the country are running out of money, have run out of money. Cuts are necessary, since raising taxes during an economic downturn is something akin to suicide. The natural place to look for cuts is bloat, where states have overspent.

And where is that, besides “everywhere”?

Well, spending bulged in the public employee payrolls. Not only do public employees tend to receive higher wages than comparable workers in the private sector, their benefit packages (lavish pensions, early retirement, lifetime medical care) have ballooned past rationality and appear, now, as unpayable.

Shock of shocks: Politicians promised more than taxpayers could deliver.

While others debate the magnitude of the problem, and how to fix it, perhaps it’s worth the trouble to explain why it happened.

And for that, two concepts should help: “Bilateral monopoly” and “the principal-agent problem.”

Bilateral Monopoly
When politicians and unions negotiate wages, both sides are monopolies of sorts. And the problem with this situation, called ‘bilateral monopoly’ by economists, is that there is no obvious natural or equilibrium price for the services.

What do you pay workers?

Under competition — the rivalry for contracts, sales — bidders and askers in the market negotiate around until they settle on a stable price. When we say “fair market price,” we just mean the price that something (or some laborer at some task) would actually fetch on the market, in the context of competition.

But there’s a whole range of prices possible when only two people are trading. The price could run up to as high as the buyer is willing to pay, and fall as low as the seller is willing to sell. That can be quite a range.

The “public education sector is an an example of a bilateral monopoly market,” says the Economy Professor website, because “a government official negotiates with the representative of the teachers’ union.”

You can see, then, how this applies to the recent trouble in Wisconsin. The public school systems consitute a near-monopoly, crowding out competition by offering “free” services. The government itself is a kind of monopoly, claiming sovereignty in a territory. In the case of it buying certain types of labor — such as school teachers and administrators — it’s a monopsony, actually: single buyer. The union(s), on the other hand, have cartelized the selling of teachers’ labor: single seller. Combine the two, and you have bilateral monopoly.

And a very skewed bargaining situation. Open for abuse.

Principals vs. Agents
One tactic unions take — indeed, a tactic many state contractors take — is to contribute lavishly to politicians’ re-election campaigns. That is, they bribe politicians to pay them as much of other people’s money as politicians can possibly get away with.

Or the unions threaten, subtly and not so subtly. In Wisconsin, whose public employees rank seventh lowest in the nation as a percentage of employed adults, they still make up one in every seven workers — and likely voters. If a politician angers them and union members vote against said politician as a block, reelection requires winning 60 percent of every non-public employee voting.

That is the sort of math politicians can do.

So, with an employer that tends to ignore market prices (many of their services have no competition anyway, so what to pay?), and a labor market cartelized into monopoly by unions, taxpayers cannot help but lose out.

The problem goes beyond bilateral monopoly. It’s also a “principal-agent” problem. Taxpayers are the principals, but their agents, the politicians, can’t be trusted. (Perhaps Wisconsin Governor Scott Walker is an exception that proves the rule?)

And taxpayers find themselves paying and paying, often for “services” of value to smaller and smaller groups. But one group remains always valuing the “services” the politicians set up: well-paid government employees.

As It Plays Out
How far can these factors push compensation rates up?

It used to be that public employees received lower wages than private sector workers, with public employees compensated by an easier workload and a degree of job security almost unknown in the private sector.

Over time, extra “benefits” were added. As unions took over the negotiation processes for government workers, wage rates increased, too. Today, private sector employees receive lower wages than their government worker counterparts, and far less in “extra benefits,” such as medical insurance and pension plans.

Union representatives and advocates often dispute this compensation disparity, but there remains one obvious way to measure government worker overpayment, as Daniel J. Mitchell concisely explains: Private sector employees are more than three times as likely to quit their jobs. Public employees, deep down, know how cushy they have it.

It is now commonplace for public sector employees to retire at 50 or younger, and to see them re-enter the government employee ranks and “double-dip.” Teachers in Milwaukee, Wisconsin, receive an average annual salary of $56,500 (far higher than the average private sector wage in the city) and an average annual total compensation package topping $100,000. (Wonder now, why the governor wants to strip public employees of union negotiation for non-salary benefits?)

The farthest end of this madness can be seen as union greed trumps even a desire to keep the governments that write their checks solvent. Thus the brinksmanship of the current Wisconsin revolt.

The Ultimate Context
If you view the state as a living trust for the taxpaying citizen, union reps and members may appear as greedy, crazed madmen.

But we mustn’t forget what states actually do. By regularly hiring too many people and engaging in too many things, government places nearly everybody out of the realm of responsibility. Lacking feedback as nifty as the private sector’s bottom line, there’s no saying that each one of us, in an “unlimited government” context, wouldn’t throw restraint to the wind and appear as madmen.

So, if you want an additional reason for limited government, here it is: Responsibility doesn’t stick when the connections between principals and agents becomes too attenuated; lacking feedback from the rigors of competition, people become crazed.

Evidence for this can be found in Wisconsin, California, and many other states of the (financially unsteady) union.

The full lesson is not merely that unions can’t be trusted with politicians, or politicians can’t be trusted with unions.

None of us can be trusted without limits. First and foremost, we need citizen-imposed limits on government.

Our right to a reasonable and responsible and affordable government trumps the right of our government employees to “collectively bargain” in the back room with our politicians.
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To read another article by Paul Jacobs, click here.