August 1, 2010
policy review » no. 162 » features
The Case Against Public Sector Unions
by John O. McGinnis and Max Schanzenbach

A powerful force for unaffordable benefits

State and local governments today are, with few exceptions, in deep
financial distress. While some governors can offer the recession, the
housing crisis, or the loss of an important industry as an excuse for
poor finances, many states are simply structurally insolvent — not
unlike General Motors prior to bankruptcy. Indeed, California’s
travails began well before the recession, and warnings about the
financial health of Illinois and New York predate the present crisis.
It is no secret that the primary cause of the states’ long-term
problems are their bloated public sectors — particularly their public
pension obligations.

Public employees unions have wielded huge influence to gain
perquisites for themselves at the expense of the public. Early
retirement, job tenure, high wages, and generous defined-benefit
pension plans have gained increasing attention from commentators and
voters, though many public sector perks are intentionally shrouded and
confuse the public debate. What has received far less attention is the
pernicious effect of public sector union privileges on the provision
of public goods in the United States. Public sector unions have
greatly distorted state spending priorities and made it more difficult
for states to devise innovative public goods that would benefit their
citizenry as whole. For example, prison guard unions have directly
influenced penal policy, fighting reduced sentences or
decriminalization of drugs. Teachers’ unions fight charter schools and
merit pay. The strong organizational rights of these unions, protected
or abetted by statute and regulations, enables their outsized
influence on public policy.

But crisis is also opportunity. The dire straits of states offer the
chance for entrepreneurial governors to abolish public employee union
privileges, like the rights to strike, to collectively bargain, to
seek binding arbitration, and to collect dues. Public employee unions
are the great reactionary force in public life today, using their
privileged position both to defend the rewards their members receive
and to block innovation. As a result, this recession offers a
political opening for both liberal and conservative governors.

For conservatives, taking on public employee unions provides a way to
eliminate inefficient spending and create a polity of low taxes and
lean government. For liberals, it provides a way to redirect spending
to effective public goods, like better educational outputs, that
public employee unions frustrate. If both liberal and conservative
governors moved against public employee unions, the public would have
the best of all possible worlds, a demonstration project pitting a
low-tax, small-government jurisdictions against a higher-tax,
high-value public goods jurisdictions. It would create a fair fight
between the attractive options that conservatism and liberalism can
offer. Union contracts, however, prevent most state governments from
nimbly responding to changing circumstances. This ossification
short-circuits the beneficial competition among jurisdictions created
by our federal system, which works best when there are not entrenched
impediments to government innovation.

Private versus public sector unions

The idea of eliminating union privileges in the public sector may seem
like a radical one. But society has changed greatly from the era in
which industrial unions were born, and, in any event, public sector
unions raise substantially different issues than those in the private
sector. In the early 20th century, workers were less educated and less
mobile, and were indeed subject to exploitation by private companies,
some of which had monopoly power in local labor markets or regularly
employed private violence. To balance the bargaining power between
such companies and their workers in such a climate, the federal
government provided the employees with the mechanism of collective

But the potential benefits of unions in the private sector are very
attenuated and probably nonexistent in the public sector. First,
public employees are typically protected by civil service statutes
that provide an important measure of job security and protection from
arbitrary hiring and firing decisions. These statutes also tend to
regulate promotion and compensation decisions. The potential for a
spoils system to arise or for politicians to seek vengeance on
opponents in government employ provide strong arguments for such
statutes. Their omnipresence, however, at the very least mitigates the
need for an additional layer of union protection. Second, governments
typically face lower borrowing costs and enjoy easier access to
sources of direct financing (i.e., taxation) than private sector
employers, which insulates the public sector from the business cycle.
Indeed, despite much talk of layoffs in government, since the present
recession began in 2008, private sector payrolls have declined by over
seven million, while government payrolls overall hardly budged. Third,
workers who prefer government employment typically have a variety of
options (federal, state, county, city) or possess skill sets that are
transferable to the large private service sector. In short, the
potential social benefits offered by private sector unions are not
present in the public sector.
The potential benefits of unions in the private sector are very
attenuated and probably nonexistent in the public sector.

The cost of public sector unions, however, is very high. For a number
of reasons, public sector unions are likely to impose larger wage and
benefits premiums than private sector unions, as well as creating
additional problems, like inhibiting democratic decision-making.
Industrial unions faced natural checks on their own power — most
importantly the power of the free market — and the free market
constrains super-competitive wages and benefits. Unionized companies
must raise capital and compete in the product market. For this reason,
economists have suggested that unions can flourish indefinitely only
when a firm has the ability to raise prices above a competitive level,
an increasingly rare circumstance in the private sector.

By contrast, state and local governments typically have the ability to
“raise prices” through higher taxes or worse services. The cost of
moving from state to state is generally far higher than that of
switching products. States also face less stringent controls from
financial markets. While state and local governments do compete in
some measure for residents and businesses, such a dynamic clearly
takes much longer to play out in the public sector relative to the
private sector, or indeed only becomes realizable in circumstances
like the present crisis. In particular, places with significant local
amenities (think California and New York) may be able to persist under
a dreadful public sector because residents are willing to pay, in
terms of higher taxes and worse services, to enjoy the weather or
cultural opportunities offered. This dynamic transfers the benefits of
those amenities from taxpayers and consumers of public services to
public sector employees, a wealth transfer that is not, we suspect,
one which most advocates of redistribution would choose as a first (or
even third, fourth, or fifth) option.

In some contexts the market for the products offered by government may
offer some constraint on public union behavior. For example, parents
may opt for private education. But the cost differential between
private and public education weakens the strength of competition in
this or indeed any area in which the government provides a service
free of charge. Parents may also opt for suburban environments where
they may more closely monitor the delivery of public goods. But even
in that case, government delivered services are predominant and state
laws passed at the behest of unions may stymie local innovations.
Thus, competition for public goods will not be effective at
disciplining public sector unions.

The hidden costs

The union wage premium, public or private, is a notoriously difficult
thing to measure. Estimates of public employee premiums run between 5
percent and 20 percent, and often focus on a particular type of union
(e.g., police officers’ unions). The “wage premium,” however, relates
only to cash compensation. Given the valuable intangible benefits of
job security, early retirement, and defined-benefit pension plans, one
wonders why any wage premium exists at all. Perhaps one can best gauge
the excessive nature of public employee compensation by evaluating
these intangible benefits. Public unions take compensation in the form
of early retirement, gold-plated health care, fewer working hours, and
large defined-benefit pension plans. We do not typically observe such
benefits in the private sector, where the benefit to salary ratio is
much lower. Why would the public sector unions focus so much effort on
benefit packages, rather than outright compensation, to a degree not
seen in the private sector?

One answer is that benefits are relatively opaque. Consider retirement
benefits. Public employee union members get very large retirement
benefits. Retirement benefits are not as transparent to the public as
wages. Wages are more directly comparable from job to job, including
from the private to public sector. The value of retirement benefits,
in contrast, depends on a variety of factors, including the age and
disability conditions under which they are available. In addition,
because public pensions are defined benefit plans that pay out sums
long into the future, the actual cost to the public of unfunded
liabilities can be a subject of monumental dispute, depending on
contestable assumptions regarding rates of return and the like. For
example, one credible independent assessment placed California’s
unfunded public pension liability at a staggering $535 billion, a sum
vigorously disputed by California’s pension managers, who placed the
unfunded portion at around $55 billion. But for the general public
even a little complexity may serve as effective camouflage. Even a
directly observed benefit, such as retirement age, is hard to quantify
in terms of cost to the state and value to the employee. Without
knowing the value of the pension, job security, arbitration
provisions, and overtime pay options, it will be difficult for
taxpayers to know whether such benefits are justified.

Some of the pension complexities favoring union members are quite
extraordinary. They are often paid a pension based on their previous
year’s wages or an average of their previous three years’ wages,
including overtime. They then are permitted to put in lots of overtime
work during this one period. The result is to top up their pensions,
severing any close connection between pensions and public employees’
lifetime earnings on the job.

Finally, retirement benefits are paid out in the future and do not
have be funded by current revenues. As a result, politicians do not
have to raise taxes to pay for them now. They can fund them with debt
or even, and perhaps better from a politician’s point of view, not
fund them at all. In any event, as just mentioned, the amount of
liability is subject to great uncertainty. But tax payments are the
most direct signal citizens get about the cost of government services.
By substituting debt or unfunded mandates, politicians under union
influence are able to distort the political process to both their and
the unions’ advantage.

The power of public sector unions

Political dynamics also explain more generally the powerful leverage
of public employee unions. In the private sector, negotiations take
place between owners, or their agents, and unions. Thus, the
negotiations are at least two-sided. By contrast, in the public
sector, the citizens of the state who pay taxes and receive benefits
are the stakeholders across the bargaining table from unions. The
citizen stakeholders are represented by elected officials, most of
whom have received significant campaign contributions from public
sector unions. In such a situation, taxpayers are liable to
exploitation by the union. Taxpayers are a classic example of a
diffuse group whose influence in politics is far less than their
numbers. Because each taxpayer is less likely to decide an election
through his vote than he is to be hit by lightening on his way to the
polls, a taxpayer rationally does not invest much in learning about
government policies or the positions of the candidates. In contrast,
public employee unions are a classic example of a concentrated group
which can monitor the behavior of government officials. Public
employee unions, by virtue of the dues they collect from members,
possess war chests from which they can contribute to politicians who
support their goals. These goals, not surprisingly, involve first and
foremost accruing benefits for their members. It is an axiom of
political science that politicians tend to reward concentrated groups
at the expense of the public, because these groups can in turn provide
the most rewards to them.

Moreover, the time horizon of politicians is short and the problems
with union benefits or job protections often become clear only after a
long while or in moments of crisis. Thus, politicians have strong but
perverse incentives to provide benefits to unions, often in hidden
ways that only come to light in bad times. Of course, by that point,
the politicians have left. The costs remain.

It is true that public employees are not the only set of like-minded
individuals who can combine to form an interest group. Others, from
milk producers to oil companies, also lobby the legislature for
benefits that often come at the expense of the public interest. But
public employees formed into a union have both special privileges and
a special position that gives them uniquely powerful and damaging
leverage in the political process. First, unlike milk producers and
other typical interest groups, most public sector unions enjoy the
legal privilege of assessing dues from their members. This privilege
helps them avoid the free-rider problems that plague collective
action. Individual people and companies are reluctant to give to a
self-serving political cause unless they can be sure others benefited
will also support it financially. But, armed with the coercive
authority to collect dues, public sector unions have the legal
infrastructure to become particularly effective at wielding political
Public employees are uniquely positioned to gain exactions. The
government operates through employees and sets their wages and

Second, public employees are uniquely positioned to gain exactions.
The government operates through employees and must set their wages and
benefits. In some sense, government must bargain with its employees
and govern their daily activities. In contrast, there is no necessary
direct relation between the government and milk producers or other
private actors. This special interrelationship provides more
opportunities for employees to seek benefits. Moreover, unjustified
benefits are harder for the public to spot. Social norms have also
developed in market democracies that force companies and governments
to deal with each other at arm’s length. Such norms are harder to
formulate and to enforce for public employees, given the necessarily
special connection between the government and its employees.

Third, the extensive and necessary relation between government and its
employees, combined with a lack of transparency inherent in that
relation, facilitates exactions peculiarly noxious to the public
interest. Public employees, unlike other interest groups, can
negotiate directly with the government for a special kind of benefits
that only employees can receive and which may not be very visible to
the public. For instance, public school teachers can bargain for
tenure. Yet tenure may lead to enormous costs when a school is unable
to fire incompetent teachers and properly incentivize other teachers,
thus leading to large losses in student achievement and later losses
in productivity for society. Paying a larger wage premium to teachers
would likely be better for society than teacher tenure, but unions and
politicians choose tenure because it is an opaque benefit arising out
of the employment relationship. The public is unlikely to focus on an
issue like teacher tenure, whose relation to the bottom line is far
more subtle than wages. Indeed, it is a benefit teachers can exact,
while at the same time alleging that they are underpaid.

The distortion of democratic politics

Public employee unions impose even more substantial costs on states
beyond the unjustified direct benefits their workers receive. Their
worst consequence is the distortions they create in the public policy
arena. Because of their concentrated influence, they are able to
substantially direct — indeed sometimes dictate — the shape of public
policy in the area in which they are employed.

The most notorious example is public education. Teachers’ unions are
the single greatest obstacle to improving education in this country.
Unions are almost universally associated with seniority pay, job
tenure (including layoffs based on seniority), inflexible work rules,
and lack of productivity-based pay. Teachers’ unions are no exception:
They make it difficult or impossible to fire bad teachers, pay good
teachers more, or conduct layoffs in a rational fashion. Media reports
have recently highlighted the difficulties in New York City. There,
teachers earn tenure after only three years on the job, and a hearing
to dismiss a teacher take years and costs hundreds of thousand dollars
(teachers are paid in full for the duration of such hearings, although
they don’t actually do any work). Although the city has stepped up its
effort at dismissals, very few teachers are fired for incompetence. In
many places, union rules on teacher assignments make it more difficult
to match teachers with the pupils for whom they would make the most
difference. The unions also make it harder to create flexible
schedules that would make more efficient use of school facilities. In
some states, such as Minnesota, unions have made it impossible for
their educational systems to participate in the Obama administration’s
Race to the Top program. In short, the teachers’ unions make the
public school rigid, unproductive, and hidebound at great monetary
cost to taxpayers and at educational cost to the children that they
are supposed to teach.

In addition, because government controls the vast majority of
education spending, teachers’ unions can use political power to
throttle competition. Because private schools and charter schools do
not necessarily employ union members, teachers’ unions see the growth
of such schools as a danger to their size and resulting political
power. As a consequence, they have tried to obstruct such initiatives
at every turn. A recent shocking example is their ability to exert
influence over the Democratic Congress in order to end the small-scale
school voucher program for low-income students in the District of

One does not have to believe that vouchers or charter schools are the
solution to problems in education to see the influence of teachers’
unions as pernicious. The nation simply does not have full information
about the most efficient way to educate its children or the best way
to address a host of social problems. Democracy works through informal
experiments. But teachers’ unions make it hard to conduct the
necessary experiments, because their focus is simply on protecting the
perquisites of their members. And teachers’ unions are extremely
powerful. As Steven Brill pointed out in a recent New York Times
Magazine article, they have contributed $57 million over the last 30
years to federal campaigns — more than any other union or corporation.
And their contributions at the state level are even larger. But
teachers’ unions are far from the only example of a union that
distorts public policy in the area of employment.
Unions are focused on getting high salaries and other benefits for
their members as well as expanding their workforce.

Correction officers’ unions are powerful forces in states like
California and New York; they push for the construction of more
prisons and for longer sentences for criminals (so that there are more
people for correction officers to guard). Their activities in
California are a case in point. In the last eight years they have
spent $10 million on state politics — either in direct contributions
to politicians or in spending on ballot initiatives relating to crime
and punishment. They have mounted full-scale political campaigns. For
instance, the California corrections union has attacked public
officials, such as the Los Angeles district attorney, who supported an
alternative to the union-favored “three-strikes law.” Indeed, Supreme
Court Justice Anthony Kennedy in February of this year noted that “the
three-strikes law sponsor is the correctional officers’ union and that
is sick!” In 1999 the union even successfully opposed a proposal to
permit the California attorney general to prosecute brutality in

One does not have to be a soft-on-crime liberal to believe that such
influence is likely to distort sound penal policy. In particular, it
is likely to inhibit experiments in the use of modern technology to
impose constraints on law violators outside of prison, at less expense
to taxpayers, and with more chance of aiding the reintegration of
criminals in society.

As this last example shows, public employee unions cannot be counted
on to support liberal causes. There is no intrinsic reason they will
advance the goals of progressives. Unions are focused on getting high
salaries and other benefits for their members as well as expanding
their workforce in order to gather more dues and be more effective at
wielding their influence for further increases in salaries and
benefits. But if progressivism is focused on helping the least
advantaged of society, unions are likely to cause systemic harm. The
least advantaged are by definition not among their members. While
members of some public service unions may work in areas that greatly
affect the poor, their interest in working shorter hours and avoiding
high standards of accountability are naturally at odds with the
interest of the clients they serve.

Of course, it is true that public employee unions are interested in
growing government. But big government cannot be the end in itself of
justified progressivism. Because of their incentives, public employee
unions in fact make it less likely that progressives can shape state
services into a force for the long-term betterment of the poor. Public
employee unions discourage citizens in the long run from supporting
high levels of public goods because citizens realize over time that a
large portion of their support is siphoned to give union members an
easier life. One question voters will come to ask is what share of
additional funds going to public schools or public transit will go to
unions. Moreover, in the long run as well, inefficient public services
are likely to drive business and individuals out of the state,
depriving progressive governors of the tax base to pay for public
goods that actually deliver the goods.

In short, public employee unions impede the ability of governors to
use states as laboratories for progressive experiments. States with
high taxes that deliver high quality public goods are viable in the
long-term competition among states. Public sector union privileges,
however, will significantly impede such experimentation.

Alternatives and prospects

While the kind of exploitation that led to industrial unions is not
relevant in the public sector, one may still have reason to worry
about some kinds of exploitation and unfairness. The most substantial
concern is that the political parties will use the public sector as a
patronage dumping ground and penalize individuals who do not agree
with the party in power. Such a patronage system could also lead to
some of the same problems created by public sector unions by
undermining the quality of public services and leading to excessive
wages and benefits.

But there are already substantial protections against these concerns
under most state laws. Reform movements beginning in the 19th century
moved to a civil service model of government hiring and promotion. In
the last century, the Supreme Court sharply curtailed the ability of
state governments to fire people for their opinions. In the cases
where these protections are inadequate, any entrepreneurial governor
should strengthen them as part of the same package in which he gets
rid of union privileges. Fairness for public employees is in the
interest of an efficient public service, but the interest of unions is
not primarily in fairness but in the insulation of employees from
accountability — a very different matter.

Given the political strength of public employee unions, it remains a
legitimate question how any governor could muster the political will
to abolish their privileges. But the current financial situation of
states is unprecedented. Even more importantly, the crushing burdens
of unfunded government employees, hidden for years, are becoming plain
for citizens to see. It is difficult to get citizens engaged in any
particular dispute with an individual union or even a set of unions.
There are too many unions and no one dispute makes enough difference
to citizens’ lives to elicit sustained interest. But the solution to
the problem of public apathy is to elevate the dispute with unions to
the level of union power in general and to make clear the ability of
unions to extort money from government and squeeze the vitality from
its services. Public employee unions came into being largely in the
shadow of the powerful case that industrial unions had already made
for themselves. But recent events have shown up the way public
employee unions exploit the powerless citizenry, depriving them of the
moral high ground.

Some governors have already reacted to the crisis by cutting salaries
and curbing pension benefits for new workers. Such action is welcome,
but it does not address the structural problems for democracy that
public sector unions cause. Once the crisis passes, unions will use
their privileged position to gain new exactions and frustrate
democratic reforms. Only through real structural change — the
abolition of public union privileges — can a state reduce the
entrenched and disproportionate influence of public employees on state

Thus, the time is ripe for a dispassionate case for radical change in
the power of public sector unions. A sitting governor or gubernatorial
candidate, no matter what his or her preferred policy (whether more
government services or lower taxes), can argue that these privileges
are unnecessary to protect workers in the public sector and a threat
to the financial and indeed democratic health of state government.
Union influence not only burdens taxpayers with unjustifiable and
nontransparent expenses, but also inhibits important experiments in
the delivery of essential public goods like education.

After the public services unions’ legally enforced right to bargain
collectively, to enjoy mandatory arbitration, to strike, and to
collect union dues has been abolished, public employees will be able
to individually and collectively petition state government about
conditions in their workplaces. State employees still have political
rights as citizens. Their knowledge of government and proximity to
power will tend make them more effective at pressing their concerns
than ordinary citizens, too. But state employees should not be able to
wield, in addition, the cudgels of legal coercion now enjoyed by
public employee unions. Democratic deliberation about the nature and
extent of public goods can flourish only if those whom the public must
use to produce those goods cannot direct and dictate the terms of
their provision.
John O. McGinnis is the Stanford Clinton Sr. Professor of Law, and Max
Schanzenbach is the Benjamin Mazur Professor of Law, at Northwestern
University School of Law.

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