State and local governments are facing very serious financial problems from the great recession precipitated by the Wall Street financial crisis of 2008. The financial problems states and localities face are due to the impact of high unemployment and slow economic growth that is affecting tax revenues, rising medical care costs and aging baby-boomers. The financial pressure confronting state and local governments has renewed discussion about the role and effects of public sector unions that last occurred in the 1960s and 1970s. In the current debate in Wisconsin and elsewhere, it is important to note that public sector unions and their labor agreements did not cause the financial crisis; there are very few unionized employees employed on Wall Street. Unfortunately, the political rhetoric and ideology of the advocates for dramatic change in public sector bargaining laws have gotten ahead of a careful consideration of what research and the facts show.
To illustrate this point, I will briefly summarize recent research on unionized teachers, their salaries and their fringe benefits that I’ve done with colleagues. This research shows that for more than a decade Wisconsin teacher salaries have fallen behind both changes in the cost of living and wage growth in the private sector. While health insurance premiums have increased in the public sector, data on unionized teachers in Illinois show increases in the cost of health benefits are paid for by teachers through a combination of lower pay or higher teacher premium copayments. For decades unions in both the public and private sector have been able to peacefully manage the adverse economic effects of rising health insurance costs and of recessions on organizations and workers. This is what leads many to suspect that Governor Walker’s budget bill has more to do with reducing union influence in the workplace and the political arena than it has to do with solving Wisconsin’s budget problems.
I recently completed a statistical analysis of what has happened to the earnings of an average college graduate employed in the private sector in the U.S. since 1995 and what has happened to the earnings of an average college educated teacher in Wisconsin. The data on private sector earnings of college educated workers is collected by the U.S. Census Bureau and is widely used by scholars. The Wisconsin teacher data comes directly from the State of Wisconsin and is available to anyone. It includes detailed data on all public school teachers in Wisconsin.
My analysis shows that from 1995-2009, the average privat -sector college graduate saw his/her weekly earnings increase by 10 percent after accounting for inflation. In contrast, from 1995 to 2010 the average teacher in Wisconsin saw his/her salary (without fringe benefits) decline by 10 percent after accounting for inflation. To state this another way, in 2009 a typical private sector college educated worker could buy 10 percent more goods and services with their salary compared to what the average worker could buy in 1995. However, the average Wisconsin teacher could buy 10 percent less in 2010 compared to 1995. Wisconsin teachers did not keep up with inflation and they also fell behind their college educated private sector counterparts. In 1995 the average college educated private sector worker in the U.S. earned 17 percent more than a Wisconsin teacher and in 2009 this gap had increased to 36 percent.
It has been argued that while the salaries of public sector workers have not risen dramatically, expenditures on their benefits, especially health insurance benefits, have increased dramatically. While this is true, health insurance premium costs have also increased in the private sector. Data from the Kaiser Family Foundation shows the average premium cost for family coverage provided to private sector employees (who are mostly non-union) increased from $5.742 in 1999 to $13,770 in 2010 (adjusting to the 2009 price level). While I don’t have premium and copayment data for Wisconsin school districts, in Illinois over the 1993-2008 time period the average inflation adjusted premium (2009 price level) for a family health insurance policy for Illinois teachers increased from $5,758 to $10,905. Governor Walker has argued and proposes in his bill that public sector employees should pay at least 12 percent of the cost of health insurance through their employee premium copayments. He argues this copayment needs to be mandated by the state because private sector workers have higher premium copayments compared to public sector workers. This argument misses a key point about how health insurance premiums and employee copayments influence other employment outcomes such as wages.
A standard prediction in economics is that in a competitive labor market two identical workers are expected to receive the same total compensation where total compensation equals salary plus fringe benefits. Thus, economics predicts that if one worker has more generous health insurance benefits he/she will receive a lower wage compared to a comparable worker with less generous benefits. While it may appear to local school districts and the state of Wisconsin that employers pay most of the cost of health insurance because they write the check to the insurance company, economic theory predicts that employees will eventually pay for the insurance through wages that are lower than what they would receive if they had less generous benefits.
Does the evidence support this theory? Professor Darren Lubotsky and I have recently finished a statistical analysis of teacher salaries and health benefits received by Illinois teachers over the 1993-2008 time period. Our results support the predictions of the theory. In districts or time periods when premiums went up the most, teachers, through their local unions, typically accepted lower salary increases or agreed to higher teacher premium copayments when compared to districts that faced smaller increases in health insurance premiums. Our results show that on average when Illinois teachers faced a dollar increase in premiums their salary income was reduced by about $1 through changes in their salary or premium copayment.
While I can’t say our results for Illinois exactly apply to the situation in Wisconsin because there are important differences between the states in their teacher collective bargaining laws, I can say our results provide a very plausible explanation for at least part of the decline in the average real salary for an average teacher in Wisconsin; through the bargaining process Wisconsin teachers protected their health benefits when premiums were rising rapidly by accepting lower wage increases.
I don’t mean to imply that there are not important reforms that could and should be made in public sector employment practices. For example, the clear lesson from my research with Professor Darren Lubotsky is that both employers and employees (in the private and public sector) have a shared interest in controlling health care costs without sacrificing health care quality. If employees and an employer can come together to save a dollar through better controls on health care costs, they have created a dollar in savings that can be split between employees and taxpayers.
This is an example where savings from controlling health care costs may be easier to realize in a unionized setting because an employer and union can come to employees with a joint plan for controlling costs. Without a union, individual workers may be less willing to take steps as health care consumers to help control health care costs. Because of the union’s involvement, workers may be more willing to participate because they know the union will help protect health care quality and ensure any gains will be split between taxpayers and workers. Unfortunately, if Governor Walker’s proposal becomes law this kind of collaboration between a local school board and union will be impossible because the bill prohibits public sector employers from negotiating with the union over anything except total expenditures on base wages.
The budget bill in Wisconsin is also likely to have other unintended consequences that have not been considered in the rush to pass this bill. My rough calculations of the changes in employee pension and health benefit contributions required under the proposal suggest the changes will cost the average Wisconsin teacher about $5,000 in total compensation. This reduction in total compensation is equal to about 10 percent of the salary for an average Wisconsin teacher ($50,305). Since salary increases under the bill are limited to changes in the cost of living (without a voter referendum), teachers will have great difficulty negotiating higher pay to offset these higher contributions.
While these changes will save school districts about $5,000/teacher in the short-run, it is likely to have a serious adverse impact on the quality of the state’s teacher workforce. My earlier discussion shows over the last 16 years Wisconsin teachers have lost ground to their private sector counterparts. The estimated $5,000 reduction in teacher compensation in the budget bill will make it more difficult for Wisconsin to attract high quality young adults into teaching. What parent in Wisconsin would encourage their child to become a teacher given the trends of the last 16 years and Governor Walker’s proposal?
A key issue being debated in Wisconsin and in other jurisdictions is whether public sector employment relations challenges should be discussed and resolved through the collective bargaining process or whether state governments should prohibit public sector collective bargaining and prevent local units of government from negotiating with their employees over issues of common concern. This latter strategy is clearly the one being pursued by Governor Walker and his Republican colleagues in Wisconsin. The budget bill allows the state and local governments to unilaterally determine conditions of employment subject only to the discipline of the labor market. Unfortunately, the discipline of the labor market could lead to significant negative effects on the quality of public services in the state for many years to come by preventing productive collaboration between employers and unionized employees and making public service less attractive and rewarding to current and potential teachers, librarians and social workers. This would be an unfortunate outcome given the lack of compelling economic evidence that would justify such a radical change.
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