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Posted at 2:45 PM ET, 02/22/2011

Are public workers and private workers really very different?

By Ezra Klein

One place where you can see that managers in the public sector and managers in the private sector are more similar than different is that unions in the public sector and unions in the private sector tend to negotiate contracts that are more similar than different. If public-sector unionism really meant "that representatives of the union will often be on both sides of the collective bargaining table," you'd likely see large and continuous wage increases. The unions would go to themselves, or their friends, and say they want fatter paychecks, and fatter paychecks would appear. But that's not how it works.

Rather, we tend to see a lot of deferred compensation: Salaries don't go up by much now, but pensions go up by more later. And we see it in the contracts negotiated by both public- and private-sector unions. That suggests that managers in the public sector are resistant to increasing their costs, just as they are in the private sector. Faced with union demands that will lead to higher costs, they often shunt them into the future. And it's not hard to see why: Politicians don't like raising taxes and cutting services any more than CEOs like raising prices or reducing dividends.

For the record, I don't like deferred compensation for exactly the reason we're seeing now: Workers think their pension is a fact when it's really just a promise -- and promises can be broken. But I also don't like watching CEOs think in terms of quarterly earnings rather than long-term performance. Myopia is a problem that unites all sorts of institutions. Just like the tensions between workers and managers.

By Ezra Klein  | February 22, 2011; 2:45 PM ET
 
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Next: Are Wisconsin's state and local workers overpaid? Part II.

Comments

Ezra:
"But I also don't like watching CEOs think in terms of quarterly earnings rather than long-term performance."

Agreed. Which is also then why anyone with that view of the private sector should share a similar view of the public sector, in that they would never support have-it-now pet-project programs like the stimulus and gi-normous deficit spending for the mere sake of garnering short-term political gains, in return for punting the costs and debt down the road to our kids and grandkids.

If we had more Democrats thinking about the long-term consequences of their give-me-mine-now policies in the public arena, as Ezra claims to support in the private arena, we would all be better off.

Posted by: dbw1 | February 22, 2011 2:55 PM | Report abuse

Ezra -

Doesn't the fact that private sector union membership has been shrinking at a significant rate while public sector union membership has been expanding indicate that there really is a significant difference between the two?

Seems that the fact that when they get what they want, both public and private unions get roughly the same thing isn't as interesting as the fact that one is growing and one is shrinking if you're trying to say that they are the same.

Posted by: BGPoutsideDC | February 22, 2011 3:16 PM | Report abuse

I do agree that the public and private sector unions end up with the same problem; the magic beans of "deferred compensation" that are an easy but carcinogenic solution to labor situations.

Outlaw defined benefit schemes and 80% of the problem goes away on both sides (though it's kind of too late now).

Posted by: eggnogfool | February 22, 2011 3:33 PM | Report abuse

So this is the part I don't get. Each one of these cities, counties, states, federal gov't sat at the table and negotiated with the unions until a contract was agreed to. Everyone negotiated "in good faith" and pensions and their funding were included in the contracts. Nothing was hidden. The cities, counties, states, etc. failed to include their portion of pension funding in their budgets to the tune of billions of dollars in short falls. Now, after years of these government agencies dithering, the bill is due. AND EXACTLY HOW IS THIS THE WORKERS' FAULT? Should these governments (local, city, state, etc.) manage to default on contracts that were negotiated "in good faith" with their workers, what do you think is next?

Posted by: mjohnson1116 | February 22, 2011 3:49 PM | Report abuse

As a point of information, in California and in many other states, pensions are not just promises but in fact prospectively binding contracts.

"Courts have ruled that public workers have a contractual interest in not only the pension they have earned to date, as ERISA provides for private-sector workers, but also for the pension they expect to earn in the future. Once promised, a pension formula cannot be reduced unless the change is “reasonable and necessary” to achieve an important public benefit and comes with “comparable new advantages” for each individual employee." (Paul and Weinberg 2010)

Posted by: micahdw | February 22, 2011 3:53 PM | Report abuse

" But I also don't like watching CEOs think in terms of quarterly earnings rather than long-term performance"


The difference, for those who care to educate themselves, is that CEOs are bound by ERISA and SEC regulations and have to both disclose and budget for their future obligations.

More importantly, the companies can declare bankruptcy.

By contrast, union lords can lobby to get they candidate elected, that candidate can saddle the state with liabilities that his government does not have to disclose, and future governments cannot shed those liabilities.

Posted by: krazen1211 | February 22, 2011 4:35 PM | Report abuse

" But I also don't like watching CEOs think in terms of quarterly earnings rather than long-term performance"

Yes.
Like cutting R&D to improve the bottom line.

Like when Detroit car companies replace their Engineer CEOs with accounting CEOs.

Then, had the companies declared banruptcy, it is not like Roger Smith got hurt by these decisions.

By contrast, when governments can dictate all terms, the public workers are at the caprice of the governor and legislator who can give the taxpayer money to their friends, and TELL the public workers they have to sacrifice.


Posted by: grat_is | February 22, 2011 5:10 PM | Report abuse

-----------------"in that they would never support programs like the stimulus and deficit spending for the mere sake of garnering short-term political gains, in return for punting the costs and debt down the road.------------"

Let's see. Should we build/repair our infrastructure now when we can borrow with low interest rates, and when there are million of people without jobs effectively sitting around doing nothing?
Or should we do it later when it will cost more due to higher interest rates, when there are no workers to do the tasks and when the spending will confront inflationary problems?
The correct answer to this question by default labels dw1b as someone without a clue. Not that that is any new news.

Posted by: blueman3 | February 22, 2011 5:47 PM | Report abuse

Ezra, are you disputing the Cato Institute that reported federal costs (wages and benefits) were almost twice those in the private sector? Somebody is lying! Who has the political agenda?

www.eclecticramblings.wordpress.com

Posted by: my4653 | February 22, 2011 9:32 PM | Report abuse

No.

CEOs punt benefits to the future to encourage private workers to continually work and improve company performance that it may fulfill and they be able to claim those promises.

Politicians make unrealistic promises to constituencies, which include public workers, to win votes in the current election. However because public workers hold a privileged position as a constituency as both a source for votes and money their unrealistic promises are never rescinded upon.

Posted by: cprferry | February 22, 2011 9:50 PM | Report abuse

Speaking of pensions, I've heard Andrew Biggs (AEI, but a researcher I respect) say that once you factor in deferred compensation, public sector workers make more than private. I haven't looked at his data (labor economics isn't my sector).

However, I have a feeling that what's at play here is that pensions impose significant ongoing obligations on companies. If the stock market underperforms and you undershoot the rate of return you have projected, you have a pension that's underfunded. This should be a familiar story.

The private sector's response has been to convert all benefits to defined contribution (401ks). This relieves employers of any stock market risk. It unloads that risk onto workers. In addition, it unloads longevity risk onto workers - pensions are guaranteed for life, whereas 401ks are obviously not. In other words, the private sector has given workers a big benefit cut in terms of deferred compensation.

Personally, I don't think it should be up to businesses to worry about pensions or healthcare. Let them focus on running the business. Frankly, this is an argument for expanding Social Security. Nobody's talked about this, but I'd like to see benefits, the tax rate and the tax base raised. I'd like to see some of the taxes invested pension fund style (instead of our current pay as you go mechanism; Canada has a hybrid system like this). You could merge existing pensions into this system.

Everybody - including me! - loves their 401k because they can see what their balance is and they can control their investments. But the 401k isn't really tested as a retirement vehicle. In fact, it was always intended to be a supplementary retirement vehicle. Conservatives have sold us on the 401k and the IRA, but many Americans' savings aren't up to the challenge. Social Security will be their only retirement annuity that is guaranteed for their lifetimes and is inflation protected (yep, that's another big risk that people need to guard against in their 401ks). The problem with Wisconsin and other states may be that everyone else's retirement benefits are too skinny, rather than the public employees being overcompensated.*

* I'm obviously aware of horror stories about pension fat cats. Loopholes in pension systems should obviously be closed. But so far, what people like Richard Cohen have are a collection of anecdotes that are unlikely to be representative of the population that has pensions.

http://www.washingtonpost.com/wp-dyn/content/article/2011/02/21/AR2011022103775.html

Posted by: weiwentg | February 22, 2011 10:20 PM | Report abuse

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Posted by: dawnclowe | February 23, 2011 4:12 AM | Report abuse

Hey my4653, how about a better reference to the Cato study? All the studies I have seen reach the opposite conclusion. And you have to remember that in a study that purported to shoe that the rich are not getting richer, Cato counted the income of dead people!

Here are two studies:

"Jeffrey Keefe, an associate professor at the Rutgers School of Management and Labor Relations, said public employees do not make more than comparable private employees. According to Keefe, comparing private and public employees with the same educational level, experience and work schedule shows private employees make 11 percent more in wages and 5 percent more in total compensation than public workers."

"The nonpartisan National Institute on Retirement Security found that, on average, total compensation is 6.8 percent less for state employees and 7.4 percent less for local employees than for comparable non-government workers."

But there are many more.

Posted by: lensch | February 23, 2011 7:51 AM | Report abuse

The difference between the public and private sectors is that it is the taxpayer who gets hurt when the deferred benefits finally come home to roost, rather than the company and its shareholders. All public sector unions should be banned because both sides of the bargaining table benefit by acquiesing to the union side's
demands. Union members, as voting constituents of the public official
on the other side of the table, have more influence over him than mere employees since he can be intimidated by their voting power. Some of the benefits bargained for, such as pensions and healthcare for retirees, take effect years in the future, when the public official is gone and a new set of taxpayers has to foot the bill. Any deal in which both sides can agree to their mutual benefit at the expense of a third party is morally wrong.

Posted by: DHarper | February 23, 2011 9:10 AM | Report abuse

Go to the following link:
morningbell@heritage.org
If you can read this and still justify collective bargaining for public sector unions, then you really don't understand the founding principles of our country.
How sad for all of us.

Posted by: DHarper | February 23, 2011 10:19 AM | Report abuse

Meticulous attention should be paid to the special relations and obligations of public servants to the public itself and to the Government. The process of collective bargaining, as usually understood, cannot be transplanted into the public service. A strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable.

Posted by: illogicbuster | February 23, 2011 11:33 AM | Report abuse

You might want to check out the materials here

http://innovationandgrowth.wordpress.com/2010/03/23/the-growing-gap-between-govt-and-private-sector-benefits/

about how it is NOT true that private sector employers are trending toward providing more non-wage compensation. Of course, this doesn't compare private-sector UNIONIZED workers vs. public-sector UNIONIZED workers, which was your precise claim. (Do you have ANY evidence to point to to support your claims?)

Incidentally, private sector employers (of unionized and non-unionized workers) have a variety of federal-law obligations (ERISA, e.g.) designed to try to assure that their pension promises are kept.

Posted by: hwinva | February 23, 2011 10:47 PM | Report abuse

mjohnson1116 - it is not primarily the workers fault that the pension plans they negotiated for are unsustainable. It is the fault of the governments who agreed to them. Assigning blame, however, does not fix the problem. It is also not the fault of the current taxpayers that these plans cannot be sustained. And the workers (actually, their representatives who agreed to the plans) are not entirely blameless. They agreed to accept deferred compensation (to be paid by no one represented in the discussion) rather than argue for higher immediate compensation. Now, either the public workers will have to take less than they were promised or the taxpayers will have to pay more for the services they receive than they are willing to.

Posted by: Elisin | February 24, 2011 10:03 AM | Report abuse

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