Union Backlash to Government Deficit Reduction Plans
In the U.S., all but one state, Vermont, has balanced budget legislation which has triggered an enormous scramble to at least temporarily eliminate the red ink. In most cases, federal stimulus spending has run out, providing a cushion earlier this cycle.
States are raising taxes, cutting spending, issuing IOUs and selling new municipal bonds. Muni bond spreads have widened sharply in recent weeks and some analysts have predicted widespread defaults at the local level. While some of the angst may be exaggerated, the well-publicized protests in Wisconsin have raised a major social divide between the public sector unions and everyone else. The consternation arises mostly with respect to the pension and health care benefits of these workers, which are more generous than for the private sector, particularly for those working in small businesses.
In the U.S, the public sector remains among the few employers that have not shifted to defined contribution plans. As well, they offer health care benefits at little or not cost to the employee. This has become a touchy issue in Canada as well, as some have questioned the fairness of taxpayer dollars going to the ‘gold-plated’ pensions of government workers. As an offset, however, public sector salaries are on average lower than private salaries, although it varies from job to job. The gap is greatest for higher-earning job categories. Labour laws are more favourable towards unions in Canada than in the U.S. This difference is reflected in unionization rates. The U.S. unionization rate is only 7% in the private sector, compared to 16% in Canada.
The gap is even greater in the public sector where the unionization rate of public employees is 36% stateside compared to a whopping 71% in Canada.
In both countries, regional governments are trying to cut costs by squeezing public sector compensation and are bumping up against substantial dissent. The Republican Governor of Wisconsin, Scott Walker, has taken on the public sector union. His plan to weaken the union took a step forward as the Republicans in the Senate passed a measure last week that takes away public workers’ right to collectively bargain for benefits. And, these workers are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in the state. The pension plan money is part of the total negotiated compensation. The bill now moves to the State Assembly which is still missing the 14 Democrats that fled to Illinois to avoid a vote on the issue. President Obama has called the legislation “an assault on unions.” There are 22 right-to-work states in the U.S. and Wisconsin is not one of them. These laws don’t prohibit unions, but they do prevent labour agreements that require workers to join a union. In some states, state employees have much less power to form unions than workers in the private sector. In contrast, in Western Europe, unions tend to be relatively powerful. Most (if not all) Canadian provinces do not allow the hiring of permanent replacement workers during a strike, and some will not permit the hiring of temporary replacement workers. Strikes of public service workers in Canada are notorious—last summer’s garbage collector’s strike in Toronto a prime example. But even in Canada, burgeoning government deficits are forcing the hand of politicians anxious to cut costs. The Ontario Liberals, trying to trim a nearly $19 billion budget deficit, raised the hackles of local unions when they announced in the 2010 budget that they would seek a two-year wage freeze on about one million public sector employees.
However, apparently to avoid a labour showdown, the government failed to introduce legislation to back up the plan. Non-unionized salaries were frozen immediately. That means many unionized public sector workers have been getting pay hikes while their non-unionized counterparts doing the same work, often in the same location, have not. The Ontario Hospitals Association has been particularly vehement about these inequities. In addition, Ontario Premier McGuinty did not extend the wage freeze to municipalities, even as he called on them to respect it. Unsurprisingly, local politicians have ignored it. For example, Waterloo Regional Police officers will see wages rise 6% by mid-2011. More than 1,300 regional government employees will enjoy wage hikes of 6.1% by 2012. Municipal taxes will rise to pay for these wage increases. In a separate and more recent move, McGuinty, in support of Toronto Mayor Rob Ford, introduced legislation that will strip unionized Toronto Transit Commission (TTC) workers of the right to strike by designating the transit agency as an essential service.
Over the past seven years, every time the TTC went on a work stoppage, they were legislated back to work by the province. In the U.S., the continuing high level of unemployment has fuelled the attempt to reduce union power. States are aggressively attempting to attract new businesses, competing against one another with tax cuts, subsidies and other incentives. Republicans are arguing that unionization is an impediment to job growth. For example, Virginia has had no collective union bargaining for decades and its jobless rate at 6.7% is much lower than in the strong-union States such as Wisconsin and Ohio. The claim is that union demands and obstructionism have hurt the economy of states like Illinois, Michigan, Massachusetts, New York, California, Wisconsin and Pennsylvania—all of which are among those plagued by the highest deficits and the highest jobless rates. The fact is, however, that union workers cannot alone bear the burden of deficit reduction. Regional governments can no longer enjoy some of the big-ticket vote-getting items in their budgets.
Changing the terms of union benefits is the equivalent of enforced pay cuts. Bottom Line: Nevertheless, expect union power to continue to erode, not just in the U.S., but in Canada and Western Europe as well, as government red ink and global competitive pressures force regions and businesses to cut costs and increase productivity, thereby creating new jobs and hiring opportunities. Entrepreneurship is the key to new business formation and ultimate declines in unemployment. No longer can employers afford to guarantee lifetime retirement income and health benefits, not even public sector employers.