WAGES AND EMPLOYMENT IN PUBLIC‐SECTOR UNIONS

I. INTRODUCTION Standard economic theory states that a union which raises wages above the competitive level will reduce employment. Empirical evidence, reviewed by Lewis [1986], indeed shows that unions raise wages and that unionized establishments in the private sector show slower employment growth than comparable nonunionized establishments.(1) Studies in the public sector also find that unions raise wages (see Freeman [1986] and Lewis [1988] for reviews), but by less than in the private sector. Unionization in the public sector, however, often increases employment.(2) In a study of 5,144 city and county governments, Zax [1989] finds that unionized departments increase employment by 3.1% over nonunionized departments. We propose an explanation that exploits a key difference between public and private sector employers: the quantity of public services provided is determined by a political process in which union members and their supporters have a voice. This voice is important when shifts from a decisive voter with a lower income to one with a higher income increase the expressed demand for public services. This increase implies the possibility that wages for public sector workers can increase when employment increases. This possibility becomes more likely the greater is the difference in income between the previous and current decisive voter. Public-sector workers would therefore use their electoral influence to ensure that the decisive voter is one with as high an income as possible. In other words, workers in the public sector gain leverage from the "elasticity" of demand for public-sector services with respect to changes in income associated with changes of the identity of the decisive voter. Most importantly, we show that higher employment may result even when union supporters are a small minority of the electorate. Though this political consideration has been suggested by others, including Freeman [1986], Zax [1989], and Zax and Ichniowski [1988], it has not been explicitly modeled or explored. The essential idea is expressed in the following newspaper story: The Port Authority [PAT] drivers union is working against county commission candidate Dan Fleck because he has urged PAT to appeal a court ruling that ordered discontinuation of a Monroeville minibus service run by a private company. Larry Klos, president of Local 85 of the Amalgamated Transit Union, said yesterday, "We have 2,700 members, and they all have relatives and friends. We will target Mr. Fleck," meaning union members will vote against the Thornburg Republican. (Pittsburgh Post-Gazette, 26 September 1991, p. 5) Not surprisingly, Mr. Fleck lost the election. Our analysis rests on an important debate, begun by Dunlop [1944] and Ross [1948] concerning union objectives, which asks whether unions maximize a well-defined objective function (such as the wage bill). The union's objective has been modeled as reflecting the preferences of the median voter in the union.(3) For example, suppose workers care only about wages and their own employment, that jobs are allocated to the most senior workers, and that wage-employment bargains must lie on the labor demand curve. The union, as Farber [1986] shows, would then set the wage so that the median worker is just retained. Such a wage policy, however, would make the union shrink over time. Researchers extended this median-worker model to consider workers with foresight or uncertainty about labor demand, and find that union employment shrinks less than suggested by static models or that it need not shrink at all.(4) These models, however, cannot explain the empirical finding that public-sector unionization is associated with increased employment. An explanation for how unions raise both wages and employment is offered by the efficient bargains (or contract curve) model, which supposes that unions care about both wages and employment and that unions bargain with management over both issues. …