Sunday, February 27, 2011

Underpaid of Overpaid?

I've seen lots of newspaper column inches and blog posts in the past week or so arguing over whether public union workers are overpaid vs. private sector workers. They all list statistics to prove the point or refute it. (eg here, here or here)

There is also a problem with comparing benefits, a situation that exists because of the distorting effects of tax policy over the last 60 years. I can't help but think it would be a far more efficient system if employers dropped all benefits and just paid the equivalent direct salary. Costs would be much better controlled if employees received the money employers paid for health insurance and other benefits and people would realize their true level of taxes if they paid all their own social security (destroying the fiction that employers 'pay' half of the social security taxes.) Employers, when making hiring decisions consider the total cost of the employee, not just the salary. The employer doesn't pay anything for the employee, but just diverts part of the employees salary for certain benefits, some of which, because of tax policy are more advantageous for the employee (and therefore for the employer who can get away with paying the employee a lower equivalent because of the employee's tax benefit).

But all this analysis misses a very basic point: there is no 'correct' wage so there can be no comparison between even supposedly identical jobs and certainly not between averages of workers doing different jobs. The situation is quite simple, employers want to pay as little as possible to get someone qualified for the job, paying up for experience and better productivity, since what employers ultimately pay for is productivity, i.e. the end product and its unit cost. Employees, in general, want to earn as much as possible for doing as little as possible, but are willing to do more or make less for jobs they find rewarding or pleasant. The wage finally agreed upon depends on the number of people qualified to do the job who want it vs. the demand for the work required. In most of the private sector (except for the ~7% unionized portion) this is approximately the situation. If you want to earn more you increase your skill-set to both reduce the number of people who can compete with you for the job and to make yourself more attractive to more employers.

Therefore there is no 'correct' wage, only an equilibrium wage determined by current labor supply and demand. What is the correct wage for a highly skilled buggy whip maker? Zero, since there is no longer any demand for this skill. Likewise for public school teachers, the 'correct' wage can only be determined by listing the required skills and competencies of a school teacher, and offering a wage to people with those skills until it is high enough to attract sufficient people with those skills for the number of positions required (along with the ability to remove people who don't meet expectations.) It is an empirical question, but given the current low standards required for most teaching positions, education colleges being the jokes of higher education, requiring more courses on multicultural issues and student self-esteem than on the subject matter actually being taught, that I suspect that absent unions, school teacher skills would be much higher or salaries much lower.

The sole purpose of unions is to counter this equilibrium, to use the threat of force or mass disruption to force employers to favor union workers over similarly skilled cheaper workers or better skilled more expensive workers. This applies both to private and public unions, but the effect is far more insidious for public unions, because private unions are restricted by employers self-interest (although the Wagner Act and similar legislation have curtailed employer's full range of action) and the fact that firms that are bled too much by their unions will go bankrupt.

Until recently public sector unions have faced no such constraints, being on the same side as the politicians they support with political support and donations (and how is it not a massive conflict of interest allowing public service unions to make political contributions?) Given seemingly unlimited taxpayer pockets to pick, the prospect of bankruptcy has seemed not worth worrying about, and at the Federal level, since the Feds can print money as they like, until the Fed finally destroys the currency, it still seems a distant problem, but at the State and local level it is no longer a remote possibility.

To paraphrase Margaret Thatcher, eventually they run out of other people's money, and for those state employees protesting in Wisconsin and elsewhere that they just need to raise taxes some more, they will soon discover, as places like Detroit and Camden already have (although they seem not to recognize it) and places like Illinois will soon discover, taxpayers can move and the prospect of paying ever higher taxes for ever decreasing services is a strong impetus to voting with your feet. So higher tax rates lead to ever lower tax revenues, creating a downward spiral until the place implodes like Greece. Welcome to the U.S. joining the Third World.

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