The Public Sector ‘Union’ Effect: Pushing Up Unfunded Pension Liabilities and State Debt
The Great Recession of 2008 left state and local governments exposed to structural deficiencies that threaten their ability to deliver basic public services. During more opulent times, state and local governments were more accommodating to political pressure by public sector unions for generous compensation packages. At the ballot box, the ability of public sector unions “to choose their bosses” translated into increases that would not meet the test of the market. But political officials also know that taxpayers, wary of more tax increases, are also their bosses. State and local governments took the easy path of not raising taxes. Because politicians want the best of both worlds, they are quick to borrow for the promises they cannot keep. The presence of public sector unions, more attuned to the details of public finance than rationally ignorant taxpayers, increases the obligations of state and local governments. A substantial swath of the academic literature demonstrates this close link between the presence of unions in the public sector and greater benefits, especially pensions and retiree benefits.
This paper will argue that the presence of public sector unions in a state leads to greater state profligacy. First, we find that every percentage point increase in the unionization of public sector employees is associated with an additional $78 of state and local government debt per capita. Informed citizens are well aware of the potential for public debts to impede the ability of governments to provide basic services, but promises to pay future benefits to public sector employees today may lead to identical issues. These promises, the most important of which are pension plans and retiree health benefits, are known as unfunded liabilities. In essence, state and local governments have committed to providing these benefits in the future, but any reasonable calculation shows that governments today are not putting enough money aside to keep their promises without severely burdening future generations.