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.