Contrary Evidence — Comparing Public and Private Sector Unions

This post is also available as a podcast under the series “Contrary Evidence”

Hi this is Jim Sherriff and welcome to Contrary Evidence. This week we are going to compare and contrast public sector and private sector employee unions and the impacts they have for their members and constituents.

Let’s start with the purpose of unions. Labor unions were formed with two primary objectives. The first, was to create collective bargaining power. The basic tenet of united we stand, divided we fall brought workers together to negotiate for better pay and benefits. The second purpose was to protect workers from arbitrary and unfair employment practices such as wrongful terminations or providing unreasonable or unsafe working conditions.

Next, let’s look at some basic history. The most enduring American private-sector union is the AFL which was formed in 1886 and merged with the CIO in 1955 to become the AFL-CIO. Unions received tremendous support from the FDR administration during the depression but shortly after Roosevelt’s death, the Taft-Hartley act was passed in 1947 which reduced the power of unions. Private sector unions reached their membership peak in 1954 with 35% of US workers belonging to a union. Since then, the percentage of private sector workers in unions has declined steadily and is now below 7%.

Public Sector unions did not really come on the scene until the 1960s. Since then, both the number of public sector employees and the percentage who belong to unions has continued to rise. Today almost 35% of all public employees belong to a union.

Why has the union participation in the two sectors gone in different directions? To understand the difference in trends, it is important to dive into the negotiating factors that have impacted unions in both private and public sectors. In the private sector, the CEO and her team are accountable to shareholders. They must balance the impact of labor concessions against the risk of a strike and the company’s competitiveness and profitability. If the company has a unique position in the market with corresponding pricing power, it is much more open to paying above market wages to avoid labor strife. If a company is in an extremely competitive market with pressure from global players, it has limited ability to make concessions without either losing market share or reducing profitability. Both of those outcomes can lead to the end of the CEO’s tenure.

Contrast the above perspective with the position of elected officials negotiating with public sector unions. Elected officials are accountable to voters and not shareholders. They have three primary ways of paying for labor concessions. First, they can raise taxes. Second, they can reduce services to save money. Third, they can defer the financial impact of the concessions to future years. With the third option, elected officials can minimize any political damage from the labor concessions during their term while increasing the goodwill of the public employee union. Not surprisingly, most elected officials choose option 3 and defer the impact. The most common mechanism that has been used to defer impact over the past three decades is to increase retirement benefits. One measure of the magnitude of the deferral is the amount of unfunded pension liabilities. At the end of 2020, estimates are that the true unfunded pension liability for states and local governments could be as high as $4.4T. This includes the obfuscated portion that results from using unrealistic investment return assumptions to determine required funding levels.

My conclusion is that public sector unions have become too powerful and detrimental to the long-term health of state and local governments and their constituents. In contrast, private employee unions have lost too much power, and this is partially responsible for our serious issue with income disparity.

The demise of private sector unions can be attributed to three factors. First, globalization has put pressure on companies in many industries to find ways to reduce costs in order to compete. Their responses include moving work overseas and moving manufacturing to lower cost and non-union southern states. Second, the pace of technology innovation has displaced many workers with machines. This has resulted in significant job losses in traditionally unionized industries. Third, since 1947, labor laws and the courts have restricted union’s ability to organize and apply pressure with collective bargaining.

Private sector companies and unions have an inherently adversarial relationship. If the union wins a negotiation, the company suffers some financial hit. As mentioned in my episode on Tweaking Capitalism, we can tackle this alignment issue for public companies with a mandatory profit-sharing system that allows employees to benefit from company success to a much greater extent. An egalitarian system that tied profit sharing payments to company profits, dividends and stock appreciation would align everyone’s interests.

Reeling in the power of public employee unions is tricky and politically dangerous. Before looking at some potential actions, let me start by stating that public employee unions do not serve the public interest and are not really necessary. Public employees are protected by civil service statutes that do not allow arbitrary firings or demotions. Without a profit motivation, government entities are much less likely to layoff employees so those jobs are more secure. During the COVID shutdowns, private sector employees were twice as likely to get laid off as public sector employees. Lastly, public sector employees earn on average over 30% more than private sector employees when pensions are factored in.

Strikes by public employee unions also have very damaging impacts on the constituents that members serve. As an example, the irrational reluctance to re-open schools during the Pandemic was the direct result of union pressure which resulted in devasting impacts on young children especially in poorer zip codes. The power of police unions has restricted police reform. In general, public employee unions are inherently adversarial to the taxpayers that fund their existence.

There is no simple solution for restraining public employee unions. Two steps would help. First, ban all manners of work stoppages by public employees. Public employee strikes are too damaging and the threat of a strike brings politicians to their knees. Second, ban any coordination or direct union involvement in political campaign contributions. The cozy relationship between public employee unions and elected officials under cuts the integrity of any compensation or benefits negotiation.

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