K-12 Tax & Spending Climate: America’s Public Sector Union Dilemma

Lee Ohanian:

There is much less competition in the public sector than the private sector, and that has made all the difference.

Since the Great Recession began in 2008, there has been a growing criticism of public sector unions, reflecting taxpayer concerns about union compensation and unfunded pension liabilities. These concerns have led to proposals to change public sector union policy in very significant ways. Earlier this month, voters in Ohio defeated by a wide margin a law that would have restricted union powers, although polls showed broad support for portions of the law that would have reduced union benefits. In Wisconsin, a state with a long-standing pro-union stance, Governor Scott Walker advanced policy in February that would cut pay and substantially curtail collective bargaining rights of many public sector union workers. In Florida, State Senator John Thrasher introduced legislation that would prevent governments from collecting union dues from union worker state paychecks. And it is not just Ohio, Wisconsin, and Florida that are attempting to change the landscape of public unions. Cash-strapped governments in many states are considering ways to reduce the costs associated with public unions.

It is important to determine why public unionization rates are so much higher than in the private sector, and whether public union employees are excessively raising costs to taxpayers. Public sector workers may be paid significantly more than private sector workers and their pensions and job security are often higher than in the private sector. Factoring in the lower likelihood of dismissal and layoffs in the public sector, public sector compensation may be 10 percent higher than market rates.

I calculate that bringing public sector wages closer in line with private sector wages by reducing them by 5 percent can reduce state fiscal deficits considerably. For California, which is among the most fiscally strapped states in the nation, reducing state worker wages by 5 percent would reduce the state deficit by about 15 percent. Moreover, some public sector workers, such as California prison guards, are paid far in excess of competitive levels, reflecting a strong union and effective lobbying that has fostered rapid compensation growth. Other unions, such as teacher unions, do not drive up compensation nearly as much, but instead have substantial negative impact by protecting poor teachers, which in turn reduces the quality of public education and reduces human capital.