Sunday, February 20, 2011

Why did the Wisconsin unions blink?

In Wisconsin, spending is several billion dollars higher than revenue, and the new Republican governor submitted a budget that asks state Public Employees to pay a much bigger share of their healthcare and pension costs. It also limits the ability of the public employee union to collect the $700 dues from the public employees. It makes contributions voluntary, instead of mandatory.

The budget would have certainly passed the senate, so the Democratic state senators left the state to prevent a vote. After two days the public employees' union agreed to the higher pension and healthcare contributions, but the governor rejected their concessions.

This dispute illustrates several economic principles. First, it illustrates the "free riding" problem faced by unions. In so-called right to work states, unions can bargain on behalf of workers, but they cannot compel workers to contribute to the union. Since the workers receive the benefits of union representation regardless of whether they pay union dues, few actually choose to pay. This limits the ability of unions to collect big dues, so they lower the dues they charge, and this limits their ability to raise money to influence legislators to give them generous benefits. This is a form of the prisoners' dilemma.

The second principle illustrated by the dispute is the nature of bargaining. If we think about the dispute being resolved not by compromise, but rather by an appeal to the voters of the state, the winning strategy is to move to the center, i.e., to offer an alternative that appeals to the median voter. By offering the wage and price concessions, the union is trying to reframe its alternative as much more reasonable than the one they started out with.

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