The main story of unions during the past half-century in the United States is the sharp decline in union membership to only 7% of private sector workers, and the equally sharp growth of union membership to 36% of all government employees. Nor are these trends unique to America; for example, union members declined to about 15% of all British private sector workers, and unions are much more important among public-sector workers.
Unions declined over time in the private sector in most developed countries partly because of the shift from manufacturing with large plants, where unions have been strong, to the service sector with small establishments, where unions have been weak. Other factors reducing unionization include the growth of competition from imports, and the sharp expansion over time of the welfare state. The latter has meant that governments are providing medical benefits and other services that had been provided by unions. As Posner indicates, an important reason for the growth of unions among government employees has been the expansion of government. This expansion increased the number of government employees, and gave them a more powerful voice as voters, and as contributors to political campaigns.
Employees in companies should be able to bargain collectively with employers if they so wish. However, employees should not have the right to monopoly power when they bargain, no more than employers should have this right. Yet while employers are subject to anti-trust laws that forbid collusions and other monopolistic practices, unions were exempt from the anti-trust laws by the Clayton Anti-Trust Act of 1914, reinforced by the National Labor Relations Act of 1935. This exemption meant that unions had the legal right to organize workers in whole industries or occupations, which would give unions some monopoly control over hiring, and the supply of workers to industries and occupations. Unions exercise this power by threatening to strike and to withhold the labor of their members.
The right to bargain collectively should also be available to government workers. Yet since these workers face only limited competition from the private sector and from other governments, they should not have the monopoly power that comes with the right to strike. Regrettably, many government unions do have this option. Strikes give government unions significant monopoly power over the public purse because they can use a strike to shut down transportation services, garbage collection, and other vital public services.
Even without the strike threat- indeed, possibly even without unions- public employees can often extract considerable benefits from local, state, and the federal government in the form of higher earnings and generous pensions and health benefits. Public employees form a sizable voting bloc with formidable resources of money and the time of members to spend on supporting political candidates who they expect will be generous when it comes time to bargain over compensation.
Whatever the source of their power, unions have managed to obtain better compensation than is available to comparable workers in the private sector. The best evidence supporting this is the much lower turnover of most public employees compared to that of private sector employees. For example, in January 2011, turnover rates among private sector workers were about 2 1/2 times those among government workers. Clearly, workers in any sector are less likely to quit if they are doing better than what they expect to get in alternative jobs. Also reducing turnover is that public employees cannot be laid off easily because they usually receive tenure after only one or two years of employment.
The higher compensation of public employees is heavily weighted toward deferred benefits in the form of favorable medical plans, and especially early retirement ages with generous retirement incomes. Retirement income is usually calculated not as a function of lifetime earnings, but of earnings during the last few years before retirement. Employees can artificially raise these earning by concentrating most of their overtime hours during the pre retirement years. Early retirement ages and generous benefits when retired are found not only at various governmental levels in the United States, but also among public employees in Europe and many other countries as well.
Presumably, in setting this form of compensation, politicians all over the world have responded to their (apparently correct) belief that voters and the media pay greater attention to earnings of government employees than to their deferred benefits. There is so much public attention to earnings that it is difficult to pay high-level government employees anything close to what they might earn in the private sector. This explains why turnover is much greater among top government employees than among the average government worker. Deferred compensation has sometimes been excessive in the private sector as well- demonstrated by General Motors’ financial difficulties- but for the most part the private sector has avoided very early retirements and other extremes of deferred compensation received by public employees.
Unfunded retirement liabilities of many state and local governments are so large that it is highly unlikely that they will ever be paid. For example, according to Joshua Rauh’s calculations in the Milken Institute Review, First Quarter, 2011, unfunded retirement liabilities of the state of Illinois are more than 5 times the state’s annual tax revenue, while the unfunded liabilities of Chicago are more than 7 times that city’s own annual revenue. This explains the recent efforts by governors and mayors of many states and cities to confront government unions and force a change in the system of retirement for state and local workers. The city of Los Angeles recently reached an agreement with its unions to increase significantly the contributions of union members to their retirement benefits. I anticipate that other cities and states will force similar, and sometimes more drastic, changes in their retirement systems.