Government Officials: Their Incentives and the Consequences

In Michigan, we have chosen to apply the principles of the NLRA to government employees, despite the federal law's shortcomings and despite the essential differences between the government and for-profit businesses. These differences affect their funding, mission, operations and ultimately, work-force composition and management. Businesses operate in a competitive environment and with an eye toward profitability. Their success or failure depends upon attracting or retaining customers. Within their jurisdictions, governments do not have competitors. Some of the services that they provide, such as law enforcement, licensing and firefighting, are not conducive to marketplace competition. And governments are funded through taxation rather than voluntary exchange. None of this makes government inherently wrong or ineffective, but it does make government and government work very different from private-sector work.

To understand why this is the case, consider a situation in which a union presents firm demands that for various reasons cannot be met within the constraints of an organization's budget. For a private business, this presents a serious problem. Even if the company has already contemplated raising its prices or introducing new, more profitable products, neither approach can be guaranteed to work. New products don't always catch on, and price increases can drive customers away. The private business has a strong and immediate incentive to reject overly expensive union demands and persuade the union to accept a reasonable compromise.

The matter is entirely different for government. Barring some statutory cap, a local government can increase taxes unilaterally and at least in the short run be reasonably certain that the increase will generate new revenues. In the short term, government officials have a more reliable mechanism for placating unions. While tax increases carry political risks, union officials themselves have the means and incentive to provide political assistance to elected officials, lessening the possibility of a political backlash and repeatedly presenting the opportunity for a political deal — expanded government in exchange for union political support. As we will see, collective bargaining agreements made under PERA have the effect of leaving government union officials with large sums of money that can be used for political purposes, and government union officials themselves are ideologically committed to expanding the scope of government. PERA provides union officials with the material and motivates public officials to repeatedly accept this political deal.

Two observations should be kept in mind at this point. First, contrary to union propaganda, not all union demands are economically viable or ethically mandatory. It will sometimes be wise and just for an employer, in both the private and public sector, to reject a union demand outright or make a more modest counteroffer. Second, human nature is such that the temptation is always present to defer difficult decisions, meaning that both corporate boards and elected officials are prone to prefer a course of action that is easier to implement in the short term, even if it is likely to create long-term problems.

Elected officials are not necessarily short-sighted and profligate when compared to business owners; it would be more accurate to say that private business owners have an advantage over elected officials in terms of dealings with unions because their short-term incentives are much more closely in line with the long-term interests of their constituents. The power of taxation, an essential power of government, gives government employers an escape route that is generally not available to employers in the private sector. Consequently, private businesses are more likely than governments to resist unreasonable union demands.[*]

That escape route has long-term consequences that have become devastating for communities across Michigan. It might be easier for governments to meet union demands than it is for businesses in the short term. The long-term consequences can still be severe. If the cost of groceries goes up on account of a new union contract, it is relatively easy to find another grocery store. Finding a new home to avoid an increase in property taxes is more difficult, but over the long run, families will respond to tax increases as they would any other artificial cost increase: They will find a lower-cost substitute - "vote with their feet," as the saying goes. Confronted with a union that is inclined to make unrealistic demands, the day of reckoning can be delayed, but not forever.

[*] One might expect that this weakness of government employers would be offset by the relative weakness of government unions, which are not allowed to strike under PERA, but this is not necessarily the case. As we show elsewhere, government employee unions are in a position to influence elections — the process by which "management" is selected — giving them a lever that private-sector unions generally do not have. Even without the strike threat, it is not at all clear that government employee union officials are in a substantially weaker bargaining position than their private-sector counterparts.