You can see, then, how this applies to the recent trouble in Wisconsin. The public school systems consitute a near-monopoly, crowding out competition by offering free services. The government itself is a kind of monopoly, claiming sovereignty in a territory. In the case of it buying certain types of labor — such as school teachers and administrators — its a monopsony, actually: single buyer. The union(s), on the other hand, have cartelized the selling of teachers labor: single seller. Combine the two, and you have bilateral monopoly.
And a very skewed bargaining situation. Open for abuse.
Principals vs. Agents
One tactic unions take — indeed, a tactic many state contractors take — is to contribute lavishly to politicians re-election campaigns. That is, they bribe politicians to pay them as much of other peoples money as politicians can possibly get away with.
Or the unions threaten, subtly and not so subtly. In Wisconsin, whose public employees rank seventh lowest in the nation as a percentage of employed adults, they still make up one in every seven workers — and likely voters. If a politician angers them and union members vote against said politician as a block, reelection requires winning 60 percent of every non-public employee voting.
That is the sort of math politicians can do.
So, with an employer that tends to ignore market prices (many of their services have no competition anyway, so what to pay?), and a labor market cartelized into monopoly by unions, taxpayers cannot help but lose out.
The problem goes beyond bilateral monopoly. Its also a principal-agent problem. Taxpayers are the principals, but their agents, the politicians, cant be trusted. (Perhaps Wisconsin Governor Scott Walker is an exception that proves the rule?)
And taxpayers find themselves paying and paying, often for services of value to smaller and smaller groups. But one group remains always valuing the services the politicians set up: well-paid government employees.
As It Plays Out
How far can these factors push compensation rates up?
It used to be that public employees received lower wages than private sector workers, with public employees compensated by an easier workload and a degree of job security almost unknown in the private sector.
Over time, extra benefits were added. As unions took over the negotiation processes for government workers, wage rates increased, too. Today, private sector employees receive lower wages than their government worker counterparts, and far less in extra benefits, such as medical insurance and pension plans.
Union representatives and advocates often dispute this compensation disparity, but there remains one obvious way to measure government worker overpayment, as Daniel J. Mitchell concisely explains: Private sector employees are more than three times as likely to quit their jobs. Public employees, deep down, know how cushy they have it.
It is now commonplace for public sector employees to retire at 50 or younger, and to see them re-enter the government employee ranks and double-dip. Teachers in Milwaukee, Wisconsin, receive an average annual salary of $56,500 (far higher than the average private sector wage in the city) and an average annual total compensation package topping $100,000. (Wonder now, why the governor wants to strip public employees of union negotiation for non-salary benefits?)
The farthest end of this madness can be seen as union greed trumps even a desire to keep the governments that write their checks solvent. Thus the brinksmanship of the current Wisconsin revolt.
The Ultimate Context
If you view the state as a living trust for the taxpaying citizen, union reps and members may appear as greedy, crazed madmen.
But we mustnt forget what states actually do. By regularly hiring too many people and engaging in too many things, government places nearly everybody out of the realm of responsibility. Lacking feedback as nifty as the private sectors bottom line, theres no saying that each one of us, in an unlimited government context, wouldnt throw restraint to the wind and appear as madmen.
So, if you want an additional reason for limited government, here it is: Responsibility doesnt stick when the connections between principals and agents becomes too attenuated; lacking feedback from the rigors of competition, people become crazed.
The full lesson is not merely that unions cant be trusted with politicians, or politicians cant be trusted with unions.
None of us can be trusted without limits. First and foremost, we need citizen-imposed limits on government.
Our right to a reasonable and responsible and affordable government trumps the right of our government employees to collectively bargain in the back room with our politicians.