Should Collective Bargaining be Constrained or Outlawed to Balance State and Local Budgets?

My last memo generated significant feedback. It was suggested that we need to bring the Mafia back to run the unions and that would take care of the problem. (This was a well thought out premise, I might point out. It was a “little extreme” but you have to admit when Jimmy Hoffa was running the Teamsters it was powerful organization and Governor Walker would have to think twice about his stance.) Others pointed out that we should be comparing apples to apples and State and Federal workers have many differences between them and the average private sector worker. The biggest difference is education and skill set.

I want to make my point clear from the last memo. It was a simple statement that the ship was going in circles because of the lack of leadership. The Wisconsin focus is ideological and not targeted on the real problem of reducing deficits and creating jobs. There seems to be no common ground. Moderates on both sides do not exist.

Before we look at the problems in comparing private versus public sector compensation let’s look a theory of collective bargaining. (I apologize to those who like my humor spread throughout the Memo’s but this one will be more technical.)

First, let us assume only perfect competition where there are an infinite number of sellers and buyers. Supply and demand set the wages and compensation.

Now let us add the Monopsony, which is the single employer. This is the company town where you work for the company that owns the town or you get out.

Some people say a man is made out of mud

 well a poor man's made outta muscle and blood..

Muscle and blood and skin and bone..

and a mind that's weak..but a back thats strong.

And he was born one morning when the sun didn't shine.. 

He picked up his shovel and he went to the mines

 He loaded 16 tons of that number 9 coal..

Til- the Straw boss said Well-uh b-less my soul! 

You load 16 tons and whaddaya get?? 

another day older and deeper in dept 

Saint Peter don'tcha call me 'Cause- I can't go...

I owe my soul to the Company Store

Tennessee Ernie Ford is my hero!

In this Monopsony case the company says that they can hire one worker at say $1 but when they go to hire another worker they need to pay the first worker more to keep them working. So if the second worker demands $2 then the cost to the company is $3 ($2 for the new worker and an extra $1 for the first worker.) This is called Marginal Resource Cost (MRC).

Now that we have considered extra costs, it should be noted that the demand for labor is determined by the extra revenue an additional worker brings into the company (Marginal Revenue Product or MRP).

For reasons I will not go into now the company will find the point that maximizes their resource hires at the point where MRC =MRP.

That means the actual wage for the monopsony is found by dropping the line where
MRC=MRP until it hits the supply line. As you can see this wage is lower than the
perfectly competitive wage, which is what you would expect since the company
(Government) has monopoly power.

Now we have to consider the Union wage. If the Union exists and it faces a
market where there are many buyers and sellers it will set the wage higher than the
perfectly competitive wage. The union in this case has the monopoly power. It says:

"Take this wage or we will strike."

In the case of Government workers versus the Government you have the big union and the monopsony employer. If they have equal power and offset each other then you end up with the perfectly competitive wage. If one or the other has more power then you end up with a lower or higher wage than the market determined wage. The result is there is a bargaining area which generally ends up with a close to competitive wage.

What you have going on in Wisconsin is a classic battle for power. Governor Walker wants to strip the unions of their power by force of law (force a monopsony wage). The Governor contends that the Unions have used their political power to elect local school board officials and therefore gotten a higher than competitive wage.

The Unions have countered by saying that is not correct and even if it were true we will allow the Governor to give us an 8% cut in wages and compensation by agreeing to paying part of our medical costs and retirement.

Walker, of course, has determined he wants the monopsony wage and nothing else will be accepted. This is the Big Union versus the Big Business. In a way they are currently determining what the bargaining area is going to be.

The question becomes: “Does the union have so much influence over the politics to have forced a Union wage higher than perfectly competitive equilibrium.” All the studies I have looked at including the Ultra conservative Cato institute agree that the wage itself is not skewed and wages in the private sector and public sector are about even.

Where they differ is in total compensation, particularly in medical contributions and retirement. (Note, these are concessions that the Wisconsin teachers have already agreed to give in to.) Most private workers have been stuck with paying more and more of their medical costs. This is no longer an issue in Wisconsin since the Union gave in on the issue.

With the Wisconsin Republican legislature passing the law last night it significantly lowers the top part of the bargaining area. The result is the new bargaining area will be between slightly above the perfectly competitive wage and the monopsony wage. Teachers in Wisconsin will most likely end up with a wage that is below the competitive wage in most states over the next few years.

A side issue that has not been talked about is the question of gender and race.

Historically, better educated African-Americans have found more job opportunities and higher pay in the public sector than in the private sector. This was first true for the Federal Government and more recently for State and local governments.
More educated women also have preferred jobs and received higher pay in the public sector.

Now I feel all is right. I have framed the question for you to determine yourself.

Economic Memo #14 The Immigration Issue

Ok, so here I sit with snow up the wazoo and frozen, thinking big thoughts. (Did you ever wonder where the term wazoo came from? I got curious so I looked it up. Here is the answer: “Slang for butt. Originally derived from the Pama-Nyungan languages (the family of Indigenous Australian languages), and thought to refer to the butt of an animal, particularly the kangaroo.” Next time I think I will lay down until the thought goes away!)

Anyway, back on the ranch. It occurred to me that we have not gotten the conservatives in the audience “riled up” in a while and that’s not good. So let’s have some fun.

 I gave my online students a discussion item on immigration last week. It was as follows:

I say that the cheaper labor costs that arise from illegal labor increase the supply of goods and decrease the price of consumer goods making them cheaper. Using milk as an example you can see the theory nicely backs my view.

2.  The farmer hirers the illegal to lower his or her costs and meet the competitive price. Does that mean my milk and eggs are cheaper? Does that mean the price of a meal at a restaurant is cheaper?  That is what the theory tells me.


Now if we believe Karl Marx's labor theory was correct, the illegal makes a subsistence wage plus a surplus. Now Marx went wrong when he thought there had to be a revolution to overthrow the business person who was stealing the surplus. With the rise of the middle class buying voting stock in the corporation it turned out the revolution was not needed since the worker (illegal) ultimately became the owner too. Theoretically the second generation illegal will progress on the economic latter and become the stock owner. So the production possibilities curve says that I will get a higher production by increasing labor Quantity (illegal’s) or Quality (their kids become lawyers, doctors, etc. (The movement for A to B is subsistence wage and from B to C is the surplus. Obviously, I win because I share in the surplus.))


3. Doesn't the illegal force my legal work force to increase their productivity so they add more output at the same cost and thus lowering the unit cost to meet the illegal lower wage? The profit formula can be used to prove that point.

Profit = Total Revenue – Total Cost
Total = Price times Quantity sold

If the illegal takes a lower wage then that will drive the legal work force out of work unless they produce more product than the illegal due to higher skill levels. For example, let’s say I hire an illegal at $5 per hour and use them one hour. They produce 10 widgets and I sell them at $1 a piece. If the legal person gets paid $10 per hour, but produces 16 widgets which is the only way he or she can keep their job, the employer will kept them since the profit is higher.

Profit = (Price times quantity) – Cost

Illegal example:  $5 = ($1 *10) – ($5)

Legal person:      $6 = ($1 * 16) – ($10)

Now as a consumer, I am all for having the competition. Since we can assume at the old productivity of the unskilled legal worker without the competition of the illegal worker would lead to less profit to reinvest in America.

(Ok, so what is a widget? The web tells me: A Widget is a device placed in cans and bottles of beer to aid in the generation of froth. Now I can say: “Here I sit with my non alcoholic Coors, freezing in snow up to the kangaroo’s butt, with a frosty frothy beer thinking big thoughts. Now that’s heaven on earth. Can you beat that?”)

Ok, I get it. Back to the salt mines.


4. What about the kid who was born in Mexico brought to the US at the age of two. He or she is educated in the US, and has lived in the US all his or her life. Should we kick him or her out? If you have met any of these kids you know they have the same value system we do and a desire to achieve that leads to increased business and employment.

 So I got an idea let’s kick ourselves in the Wazoo and send them “back” to Warsaw, Dublin, and Mexico City reducing the production possibilities. Picture yourself kicking yourself. Not only would you look stupid, you really can not effectively do it, and even if you are successful your hurt your wazoo or foot or both. (Now you are sitting around with snow up the wazoo, freezing, drinking the frothy non alcoholic Coors Amber with a sore butt and foot. That not a pretty picture!)

5. Does the illegal using a fake Social Security card ever get the money back? If not then he or she makes social security cheaper for me, right? My unit cost decreases. The first graph will work here as well.

I can go on but what is the use. If this were a bar fight I would win. I punched the other guy in mouth before he or she knew he or she were in a bar fight, clobbered him or her (remember discrimination can not be proven economically as a benefit to me) with a bottle over the head, turned him or her around and kicked the person in wazoo, like John Wayne would have, right out the door. (You have probably had enough of the word wazoo, but I but I still think it is funny….. a kangaroo butt. I would never have thought of that. )

Ok. I will let the other person have a punch or two, but I get to wear my kid’s old hockey gear.

So Student #1 writes back.
I recognize that illegal workers provide a service to the workforce of this country.  However, I do not agree with illegal immigration.  Illegal immigration is just that, illegal.  I sympathized with those many people that escape their country looking for better lives.  I understand the need and would probably do it myself if necessary.

My response:  
Basically this is saying “Don’t confuse me with the facts.” I do not think that is a good response, it is a biased assertion. Where is the logic in that argument? We all assume that our relatives came over legally, but I am reminded of my grand mother. We held a 100th birthday party for her a few years ago. Six months later my uncle dies. Now grandma and I were never very close, so when she purposely sits down next to me I know this is not random event. She says: “I’m not 100 years old, I’m 96.” So I told her that was not a problem, she was still old as dirt!” (Just kidding of course, Grandma was a nice person and I would not have offended her. We just lived a good distance from her when I was growing up so we did not see her much.)
Anyway, back on the milk farm, she said that when her sister and she arrived at Ellis Island they were 17 and 15, and feared they would be sent back to Poland, so they added 4 years their ages” Also, remember, Georgia was originally populated by criminals by the crown and most indentured servants were let out of debtors prisons to go colonies.

Student #2 writes back:
 In my experience, the types of jobs that illegal obtain are low level, low paying jobs.  The unfortunate part of the situation is that they are treated in a lowly manner in many instances.  Is it morally acceptable that we allow illegals to stay in this country because we 'value' them as human beings or because as a nation we are spoiled and feel we are undeserved as an advanced species to perform the jobs they are willing to do?  If an illegal uses a fake social security number, they don't deserve that money back.  It is a necessary deduction we all have to pay in order to take care of our current elderly population.  Engaging in illegal activities means you do not get rewarded.  I feel this includes heath care as well.  I should not have to pay for the welfare or insurance for an illegal immigrant because they managed to navigate the borders.  In my job, I see cases all the time where citizens, legal aliens, and permanent residents get into accidents caused by illegal immigrants without the proper driver’s licenses and insurance.  The law abiders are the ones that end up paying.

My response: 
Now she has a few good points there. Even thought I am an economist and only care about the lower prices, I can invoke my moral code. It is called the Basic Economic Maxim. It states: Political considerations always win out over economic considerations. If it is politically right then we get it despite the economics. If it is economically right and politically wrong we do not get the good or service.

My answer goes on though. I would add... 

So have you been effective in sending these folks home? There are beavers at Argonne labs that build dams on the little river that runs through the campus. Grounds persons trap them and move them to the forest preserve many miles away. Two days later the beavers are back. They are not going to be forced leave behind years of capital improvements they have built.  How about the kid brought across the Rio Grande at the age of two. He or she is married with a three year old and a two year kid in Chicago and gets picked up for speeding. We send him or her to Mexico City, a city he or she has never been to, in a country they have never been to, away from all their friends, relatives, possessions, and network. Where do you think they are headed back to? Are you ever going to stop this person from coming back? They are great employees that never miss work, are  highly productive, have the same moral values as the employer, go to church each Sunday, play soccer with their kids, are Cub fans. Do you think I will hold his or job till they get back from vacation?

Another side story...

I had a young woman in class a few years ago. She was a great student, never missed class, articulate, worked two jobs, took an overload, etc. You can tell when a student is going to do well in life and the kid was ticketed for success. All of a sudden she disappears for two weeks. When she comes back she tells me that she got picked up for a tail light out on the way home from school and they send her to Mexico. Do you think I gave her excused absences for my quizzes, let her do the homework without penalty, and gave her a make up a test without penalty? You bet I did, and I would do it again in a heartbeat!

Has the billions we have spent keeping the illegal alien out of our country worked? If I have a family in Chicago and they caught me and sent me to Mexico, do you think I would not walk 3 days in 120 degrees across a desert, led by someone I paid $5000 to and do not trust. Would I climb into a railroad oil tank car and let someone close the hatch and ride for two days in the dark to get back to my family? Would you?

I think a better alternative, allowing a way for the illegal to become legal and take advantage of the above economic theory. I immediately get back the billions I am spending on the border for health care and the like. I get increased productivity and increased quantity of labor. Everyone would be a full payer in the system. It seems to me that if you admit you can not send back the illegal or stop the flow, then you take advantage of the economic benefits of making them legal.

I would like to leave you with another student’s response which I could not say better. 

Many immigrants are here legally because their expertise is very much needed. I'd like to cite some observations from personal experience. Few years ago while completing my associate degree; I discovered that most of my science classes were taught by professors who were not American born citizens. This trend has not changed in the academic arena. To the economist, the utilization of the technical skills of these immigrants ultimately increases the production of skilled scientists for the nation.

The healthcare industry is another classic example of an immigrant-run system. A significant percentage of healthcare professionals (doctors, pharmacists, nurses and therapists) are not bona fide Americans. Yet these so called foreigners continue to be the bedrock of major institutions of the American workforce! When hospitals are fully equipped with qualified healthcare personnel, the quality of care provided to patients become markedly improved. In other words, and from an economic standpoint, the increase in manpower increases productivity i.e. quality patient care.

It is possible that some employers are exploiting undocumented immigrants for their selfish financial advantage. In general, I think allowing "legal" immigrants to contribute their skills and potentials to the job market are ultimately good for the American economy.

Now I want to remind you that the Economic Memo’s are designed to provoke rational economic thought. My job is not to force my opinion onto you. It is to provide you with an understanding of the economic tools and arguments on contemporary issues. You can confirm your views or change them based on the tools. So those of you who passionately agree or disagree and want to respond, I ask you keep the discussion educational in nature.

I other words, you can kick the kangaroo, but only if you use economic arguments.