Chapter 6
Financial Impacts of
Unions and Collective
I. Introduction
Most state and local governments intermittently suffer the throes of fiscal crisis.
e fiscal problems that can assault governments are legion: inflation, recessions,
increased service demands and costs, shifts in population and tax base, declining
intergovernmental aid, expensive court orders or settlements, tax and expenditure
limits, citizen resistance to tax increases, infrastructure deterioration, burdensome
federal mandates, and so on; the list is almost endless. Severe fiscal stress ran ram-
pant during the Great Recession and its aftermath as virtually all state and local
governments, as well as the federal government, struggled to balance their budgets.
Some failed; among them were Jefferson County, Alabama; Central Falls, Rhode
Island; and San Bernardino, Stockton, and Mammoth Lakes, California. All filed
for bankruptcy protection during 2010–2012. Financial adversity has become a
chronic affliction for some state and local governments, particularly those that have
been net losers in coping with the challenges of technology and global markets. e
major social, economic, and political forces contributing to government fiscal stress
show little sign of abatement. Meanwhile, state and local government employment
and payroll costs have risen steadily. States employ more than 4.4 million full-time
equivalent workers, and local governments employ approximately 12 million. Total
state and local payroll costs exceed $70 billion (U.S. Census Bureau 2012).
154 ◾  Labor Relations in the Public Sector
e conventional wisdom is that unions, through collective bargaining and
various political activities, contribute to state and local fiscal difficulties by inflating
payrolls and operating budgets. It is often asserted that the primary impact of public
employee unions is to drive up the cost of wages and benefits. Because 40%–70%
of the typical local government and school district operating budget is allocated to
employee compensation, strong union influence in setting pay and benefits can,
indeed, press financially troubled local jurisdictions up against the fiscal wall by
achieving monetary gains that they cannot afford. State government payroll costs
represent a smaller percentage of the operating budget, but they are also influenced
by union pressures for wage and benefit increases. Because government remains
a highly labor-intensive enterprise, if unions drive up pay and benefits then they
also establish an upward bias on state and local expenditures. In the private sector,
a firm may recapture compensation increases through higher prices or improved
productivity or absorb them through reduced profits. In government, a wage
increase may translate into a tax or fee hike or a service cutback, making choices
more constricted, more difficult to make, and more visible to the relevant public.
is chapter assesses the financial impacts of public employee unions. ere are
two major types of impacts: impacts on the budgetary process and outcomes and
impacts on employee wages and benefits. After a description and appraisal of union
influences in budgeting, the empirical literature is examined to identify the dollars
and cents wage and benefits effects of unionization. Various factors that influence
wage and benefits outcomes are discussed, including parity arrangements, prevail-
ing pay rules, seniority rules, and comparable worth criteria. e consequences
of public sector wage and benefits decisions for government decision makers are
considered, along with possible citizen reactions to these decisions. A brief descrip-
tion and analysis of gainsharing and productivity bargaining is followed by a look
at the financial impacts of federal employee unions and collective bargaining.
e chapter provides no simple, quantitative answer to the question of what are
the specific financial impacts of unions and collective bargaining on government.
e nature, size, and significance of union effects on budgeting, pay, and benefits
are variable, complex, and multifaceted. e major conclusions are that (1) whereas
unions have exercised an upward influence on budgeting and compensation
outcomes in most jurisdictions, the overall effects have been moderate and not as
substantial as the monetary impacts of unions in the private sector and (2) the mag-
nitude of the impact varies greatly over time, function, and jurisdiction.
II. Budget Making and Unions
e annual (or in some states, biennial) operating budget determines who gets what
monies for which purposes. To the extent that budgetary allocations go to public
employee compensation, there is that much less money for other expenditure items.
For public employees, however, the operating budget determines the size of their

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