Last week I wrote about falling wages in public sector unions, and suggested that due to the power of public sector unions those wages will just return to trend after the recession is over. I therefore suggested it would be better if public sector unions lost power rather than wages, since you could permanently take power but not above market wages. Via twitter labor economist Mark Price (@price_laborecon) disagreed with my claim that public sector unions have “too much” power. If they did, he argued, it would show up in compensation data, and the evidence suggests it doesn’t. He linked to three reports (here, here, and here) that show that public sector wages are no higher than, and often lower than private sector wages.
I’ve seen the paper by Bender and Heywood, and the one from CEPR before, and the third one is a paper on public sector premiums from the Economics Policy Institute. The Bender and Heywood paper uses household survey data on income and worker characteristics from the yearly Outgoing Rotation Group in the Current Population Survey (CPS) to estimate whether there is a public sector wage premium after controlling for worker characteristics. I’m going to focus on this paper because it is the strongest and most relevant: the CEPR paper is missing important controls, and the EPI one only applies to New Jersey.
In short, the study finds that controlling for age, education, race, gender, whether they are married, state of residence, and union status, both local and state public sector employees are paid less than private sector employees. The first thing to note is that union status is controlled for, which means that public sector workers are paid less if you ignore the wage premium they get from being in a union. My claim was that public sector unions possessed too much power, so removing a wage premium attributable to union status gives you an answer that is beside the point. My claim isn’t that all public sector workers have too much power, or that public sector unions have too much power relative to private sector unions.
This study in fact supports my argument if you use Dr.Price’s metric. The regression coefficients on page 8 of the report show that the union wage premium is between 15% to 16%, while the public sector wage discount is around 11%, meaning unionized public sector employees are paid 4% to 5% wage premium. Thus the power is showing up in compensation, which is what Dr.Price suggested should be the metric for “too much power”.
There are other interesting issues here as well. I obtained the datasets from here and with the help of Dr. Bender, one of the study’s authors, I was able to recreate the results. One important point is that if you include occupation controls, and include average hours worked and hours worked squared (which you should) the union premium increases and the public sector discount drops, so that the total differential (union + public sector) grows to 18.1% for local and 15.2% for state.
Another important point is that some public sector jobs will obviously pay less than private sector jobs for reasons unrelated to unions or wage setting power. This is particularly true for more high skilled occupations. Public defenders, for instance, are going to get paid less than the average private sector lawyer. I don’t know whether this is due to lower abilities and skills or simply a willingness to accept lower pay because they want to perform a civic duty, but either way it’s pretty unrelated to the issue of public sector union power.
The heterogeneity of these results across different skill levels becomes clearer when we look only at workers with less than a college education (including those who had some college but not complete it). The union wage premium here increases to 22% for both local and state, and the (now statistically insignificant) public sector discounts are 1.2% and 1.3%. Thus lower educated workers earn around 20% more when working for a public sector union than they would if they were non-unionized public or private sector workers.
A final point I’d like to make is that a wage premium is not equal to public sector union power. A powerful union may use all of it’s bargaining power to negotiate for absolute job security, which could then select for a different set of workers with lower unobservable skills. In this case you would observe wages equal to or even below private sector wages despite a clearly powerful union. Some would argue this is exactly what teachers unions do.
[UPDATE: Regression results above slightly corrected]
8 comments
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Monday ~ August 9th, 2010 at 1:53 pm
Darek
So the lesson is what? Weaken unions so that unionized workers can do just as poorly, or equally (depending on what stats you decide to select to support whatever argument you want) as non-unionized workers… thanks.
The problem isn’t powerful unions. It’s why people feel they need to be in a union in the first place – why they exist. A company or employer would pay you beans if they could and in fact, over the past few decades haven’t raised real wages* while we’ve seen increases in costs of goods while needing to get into debts to help pay for them.
Unions can be and often are the only counter-measure workers can use as a means to maintain a decent standard of living in a world where companies are seeing record profits (see the last 30 years while wages remained the same), not that unions themselves don’t come with their share of troubles.
And now when organized labor in this country is especially weak during these economic times you think what power certain unions have is too much? Wow.
Come down from the ivory tower, it’ll do you good – or at least see that what you’ve written should look favorably onto unions rather than poorly – though its clear which angle you’re trying to reel in.
* link: http://abcnews.go.com/Business/strangling-middle-class-america/story?id=11325933&page=1
Monday ~ August 9th, 2010 at 3:16 pm
Matthew Yglesias » Public Sector Pay: Better Fewer, But Better
[...] Many commentaries today on the subject of public sector pay, my favorite of which are by Jonathan Cohn and Adam Ozimek. [...]
Tuesday ~ August 10th, 2010 at 7:43 am
Mark Price
Adam what I believe you mean when you say “I therefore suggested it would be better if public sector unions lost power rather than wages, since you could permanently take power but not above market wages” is that wages are too high in the public sector. The studies I sent you make it quite clear that wages for workers in the state and local sector lag wages in the private sector.
The fact that there is a union wage premium in the public sector just as there is in the private sector is hardly evidence of your rather sloppy assertion that public sector unions have too much power. By that standard private sector unions have “too much power”. If that is what you believe then all I can do is recommend you read “What do unions do” by Freeman and Medoff there was an update a few years ago in the Journal of Labor Research. I don’t expect that it will change your mind but at least you can get a fuller sense of the contested territory that is the union advantage.
If I were looking to back up your assertion I would look to trends in wages over time not at a point in time. If you are right about “too much” power then the wages of public sector workers should be substantially above those of the workers in the private sector and growing much much faster than in the private sector.
As you can see in the Bender and Heywood data as well as in Figure 1 on page 9 of their paper is quite the opposite trend.
Now you do raise a perfectly valid point that power could be traded for employment rather than wages. But this doesn’t create a problem for me I’m not the one arguing there is too much power in the public sector you are. So where’s the beef do you have systematic evidence of a massive explosion of the public sector in the past 20 years?
Wednesday ~ August 11th, 2010 at 5:52 am
NY
You wrote that, “controlling for…[various factors]…both local and state public sector employees are paid less than private sector employees”
Surely this SHOULD be the case given the lower risk of being fired when in 1) the public sector and 2) a union? i.e. there should be a risk/return trade-off in employment, whereby security is traded for wages?
Wednesday ~ August 11th, 2010 at 9:01 am
The Power of Public Sector Unions, ctd. « Modeled Behavior
[...] ~ August 11th, 2010 in Economics, Law | by Adam Ozimek Mark Price has some thoughtful comments in response to my previous post on public sector unions, and I recommend those interested in the [...]
Thursday ~ October 14th, 2010 at 8:09 am
Will cutting wages fix labor markets? « Modeled Behavior
[...] to the appropriate compensation level of federal bank regulators.” But we do know that a union wage premium exists in public sector just like it does in the private sector, so that anywhere that public employees belong to a union [...]
Monday ~ February 21st, 2011 at 1:18 pm
Anthony
Wages in the public sector *should* lag those in the private sector, because the public sector offers better non-economic compensation, primarily in terms of job security, but often also in terms of effort required on the job (which ties in with job security).
Here in California, the wage premium for (almost all unionized) public-sector workers is fairly high in most fields, except for positions where pay over about $120,000/year is normal. (This is based on my observations of job postings, etc., and is not a statistically-controlled study.)
Teachers unions in California seem to have obtained both above-median compensation and near-absolute job security – the only way a teacher can lose a job is not having enough seniority when budget cuts force layoffs. (And even then, they get 5 months notice, as required by state law.)
Tuesday ~ February 22nd, 2011 at 3:03 pm
Protests in Wisconsin « A Reluctant Apostate
[...] is. Statistics on the matter give a partial picture and Adam Ozmiak of Modeled Behavior has some calculations of public sector union wage premiums based upon historical data: The regression coefficients on [...]