Tuesday, November 1, 2011

Tale of Two Incentives

In 2010 36.2% of public employees were union members. Whereas private sector, only 6.9% of employees were members of unions (Bureau of Labor Statistics). Numbers like these, and they are part of a trend, beg the question, "Why?" The answer comes both from a theoretical and empirical perspective.

First, let's see why, theoretically, this shouldn't be surprising. Many of you are familiar with a "monopoly." Perfect monopoly exists when there is one firm in some goods market. Therefore, the firm's individual demand curve is the same as the market demand curve. The firm then picks whatever price and quantity on the demand curve satisfies the "marginal revenue = marginal cost" optimization condition. That's all technical and whatnot, but the point is "They have pricing power over their goods." There also exists something called a "monopsony." This is the analog of monopoly in the labor markets. That means, there is one employer who, therefore, has power over the prevailing wage. Naturally, it should be no surprise that, when there is no competition, the employer can pay lower wages and still find people to work there.

In many markets (e.g. public schooling), the government has monopsony power. Having unions to "fight back" and prevent the government from taking away benefits and lowering wages (not that the government would EVER be unfair!!!), takes away some of this monopsony power.

The empirical argument is much more obvious. You're the governor. You would like to be re-elected. And a large part of your constituents are blue-collar, union employees. In what world would you try to raise the retirement age, or lower wages, or cut pensions?

Actually, I'll tell you which world: this one. And you can thank the recession for that. Cash-strapped states are looking to raise finances. Now, we see the titular "two incentives." You're the governor again. You have your blue-collar, union constituents. But this time, you've got a state in dire economic straits. Lower pensions? Infuriate the unions, but become the "recession fighter?"

That questions will be answered as states take up these issues. So keep your eyes open and watch the tug-of-war...

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