Wisconsin. Ah, a picture of Wisconsin's state capital building in more tranquil times.
You might ask yourself: how does a nice monopoly such as state government go bankrupt? What do unionized state employees have to do with the bankruptcy of a nice monopoly such as state government?
State government as a monopoly, and monopoly pricing
Governments are monopolies over the services they render. Monopoly theory is vast and undetermined. However from monopoly theory we can surely state that: price can/could/may be influenced by a monopoly.
Conventional wisdom goes one step further and assumes that monopolies controlling prices is related to wages paid. That is, if a monopoly can influence price then surely a monopoly can influence input costs including wages paid.
This is where conventional wisdom comes to the fork in the road and creates a conventional fallacy.
Monopolies and unionized labor
Its intuitive to think that monopolies influence price and hence influence input costs including labor costs. That a monopoly would never deal with a unionized work force. That the monopoly would depress wages. Wrong. Its counter intuitive.
The classic example was the once telephone monopoly Atlantic Telephone and Telegraph (AT&T). Did AT&T have a well compensated work force? Yes. Were AT&T employees unionized? Yes.
Why do monopolies hire monopolies?
Why would one monopoly hire another monopoly i.e. unionize work force. Because the monopoly has pricing power in that: price can/could/may be influenced by a monopoly. Why bother fighting it out at the collective bargaining table when the monopoly can merely pass the cost of labor onto consumers through price.
What if a monopoly or quasi monopoly is regulated as a public utility?
If price increases are regulated by a public utility commission i.e. price controls, the monopoly will act as a "non profit" regarding compensation as compensation figures may well be a matter of public record. That compensation will be paid under a veil.
How so? You see, non profits such as rural electric co-op's know that their members (end users) will be very unhappy if the price paid for wages is high. The co-op members will think the co-op is functioning to enhance itself rather than functioning as a collective scheme to secure rural electric power. Hence the rural electric co-op keeps wages reasonable and skews compensation to benefits and retirement. They can then advertise to their co-op members that wages are very reasonable when in fact total compensation [wages, benefits, and retirement] is much, much, much higher than the pure "wage" they advertise to their co-op members.
Government Monopoly and collective bargaining schemes
One must examine the "both sides of the table" phenomena when considering collective bargaining regarding a government monopoly. What is the "both sides of the table" phenomena?
(1) if bureaucrat X is negotiating with collective bargaining public sector union Y, exactly what motivation does bureaucrat X have regarding negotiations? The problem goes back to Milton Friedman's fourth category of spending: other people (bureaucrat X), spending other people's money (tax payers money), on other people (recipient class which in this case is a public sector union). Therefore the bureaucrat has no motivation because he/she is spending other people's money not his/her own money,
(2) public sector unions have found that they can collect dues through members and funnel dues into political action funds. They then fund the campaigns of politicos that promise them [public sector unions] more compensation. They not only fund certain politicos but actively encourage their union members to campaign for the politico. Once they get their particular candidate elected they have now secured a politico who over sees bureaucrat X.
Wisconsin is coming to a state capital near you!
We know monopolies will hire monopolies. We know that if "wage" is a matter of public record compensation will be skewed toward benefits and retirement compensation. We also know that collective unionized bargaining in the public sector suffers from the "both sides of the table" phenomena. Finally we know that the monopoly through pricing power influence will pass on increased labor compensation costs to the end user. Finally, in the realm of government monopoly price is tax and tax is increased to the end user which is the tax payer aka YOU.
Therefore, unionized collective bargaining in the public sector is a collective bargaining scheme against the tax payer. The collective bargaining scheme has no incentive to reduce costs as cost can be merely passed onto the end user. Moreover, the collective bargaining scheme, in a government monopoly setting, actually has incentives to pass on larger and larger price increases to the end user in the form of price influence and in this case tax increases. Lastly, the end user, the tax payer aka YOU are not represented at the negotiating table due to the "both sides of the table" phenomena.
Update 02/27/2011: The Political Economy of Government Employee Unions - Thomas DiLorenzo
Update 03/01/2011: Katherine Kersten: The good life (for unions especially).
Update 03/02/2011: Dodging the Pension Disaster - Josh Barro