It’s the Economy, Stupid- Public Sector Unions are not the Cause of State Budget Deficits

Ohio voters will decide “Issue 2” on Tuesday, Nov.8, a referendum on a law which limits collective bargaining for government employee unions. As many as 12 other states (including Wisconsin, Ohio, Indiana, Arizona, Idaho, Michigan, New Hampshire, Oklahoma, South Carolina, Tennessee, Utah and Wyoming) have already enacted anti-union legislation, which proponents justified with claims that public sector unions are behind the state budget deficits.

Their central argument does not withstand scrutiny. A report I co-authored with two of my colleagues from UC Berkeley, entitled “The Wrong Target: Public Sector Unions and State Budget Deficits,” analyzes the relationship between public sector workers, their unions, and state budget deficits. We found the that budget shortfalls in states across the United States were caused by the housing bubble burst and the continuing effects of the great recession, and not public sector workers or their unions.

First, we looked at changes in public sector employment. Over 30 years and five recessions, state and local government employment has been steady at about 14.2 percent of workers. The percentage goes up slightly when the economy goes down since there are fewer private sector jobs, then recedes as the economy grows. There goes the myth of enlarged state government (see chart 1).

Secondly, our analysis found that states with the greatest density of public-worker unions tended to have slightly fewer workers on public payroll than non-union states, not more. States with the lowest union density averaged 74.6 state and local employees per thousand residents in 2009, while the highest union-density states averaged 68.3 per thousand residents—and between 2001 and 2009, the number of state and local employees per thousand actually fell in the highest union-density states. There are a number of possible explanations for the difference—what is clear is that public sector unions are not increasing the size of the public sector workforce, as is claimed (see chart 2).

Next we looked at compensation:  an earlier study  by the Center for American Progress found that public sector worker compensation has actually fallen as a share of total state budgets in recent decades. Nor, it turns out, are public sector workers compensated more, on average, than their private sector counterparts. A number of recent studies, including one on California by my co-author Sylvia Allegretto showed that an “apples-to-apples” comparison that takes into account education, experience, and other factors that may influence pay, reveals no significant difference in the level of employee compensation costs on an annual (or per hour) basis between private and public sector workers. Yes, this takes into account the total cost of employee compensation, including health benefits and pensions. Public sector workers bargain a greater part of their salary into benefits, but take home lower wages. In fact, between 2004 and 2009 public sector compensation grew at a slower rate than private sector compensation—including the cost of benefits.

Finally, we tested the relationship between the level of unionization in a state and the size of the state budget. When we control for the decline in housing prices, we find no statistically significant correlation between the size of the budget gap and the level of unionization or union strength. We get the same results if we control for unemployment or change in GDP.

This last point should have been obvious. Budget deficits were caused by a massive decline in revenue due to the economic downturn. The claim that public sector unionization is the cause of the budget deficits simply doesn’t hold water. Bad diagnoses result in bad medicine. For states to address their budget deficits we need to focus on fostering economic growth, resolving the housing crisis, and putting people back to work.