WEA Trust's Red Herring

From the Journal Sentinel:

In freeing school boards from bargaining with employees over anything but inflation-capped wage increases, Wisconsin lawmakers might have opened the floodgates for districts seeking to drop coverage by the state's dominant - and highly controversial - health insurance provider for teachers.

WEA Trust, the nonprofit company started 40 years ago by the state's largest teachers union, currently insures employees in about two-thirds of Wisconsin school districts. The company's market dominance has dropped in recent years, although not as much as some school officials who complain about the company's costs would like.

This has only been a minor issue in the coverage of Wisconsin lately so many people may not even know that  many teachers are covered by an insurance company run by the teacher's union and that this particula insurance coverage is negotiated into contracts by the union.  It is not clear whether or not the insurance provided is competitively priced.  This article gives a good, short account of the situation with reaction from both sides, but it also includes this ridiculous piece of obfuscation:

But Steve Lyons, director of public affairs for WEA Trust,... also said in an e-mail that the insurer returns 93 cents out of every health care premium dollar back to the districts in health care coverage, while "some of our for-profit competitors keep more than 20 cents out of every dollar."

How much an insurance company spends on claims (also known as the medical loss ratio) may be good to know, but by itself doesn't tell you whether or not the insurance premiums are priced too high or too low, compared to the competition.

Imagine an insurance company that just paid every claim without checking it's veracity.  It would likely have low administrative costs since it didn't bother to check if any of the claims are real, meaning it would pay out much of every dollar it took in as a claim.  At some point it would have to raise premiums, since it would likely attract a higher percentage of phony claims once it developed a reputation for paying them no matter what.

If you think my example of the all-trusting insurance company is too ridiculous to shed any light on the matter, consider Medicare.  There is debate about exactly how much it costs to run Medicare, but many on the left argue that Medicare spends more than 93 cents of every dollar on claims, and yet high Medicare spending is one of the major items driving our large long-term deficits.

School districts purchasing insurance from the WEA Trust may or may not be getting the best possible price on insurance.  But don't be fooled by the quote above, knowing that they spend 93cents of every dollar on claims doesn't automatically make WEA Trust a good deal.

Talking through Governor Walker's budget repair bill

As expected today, I got a lot of questions/comments about the passage of the modified version of Governor Walker's budget repair bill.  At times like these no one remembers the fact that I am often critical of the Governor, I guess that just goes with the territory.  Here are some of the items that I found myself repeating during conversations today, and a few that didn't come up, but I wish they would have.

1.  The Senate was able to pass the bill without any Democrats because they took out the fiscal items.  Yes, asking public workers to take a pay cut is in a sense "fiscal," but in this case fiscal is referring primarily to times when the state takes on new spending obligations (so there is a higher bar for consideration, that 20 Senators be present).

2.  Yes, Walker has been telling us this is a fiscal item.  That is a political argument, and not likely to bear on any pending legal case.  This is a problem that should be solved at the ballot box (either in 2014 or before if there is a recall).

3.  What you are hearing about the 24 hour notice has to do with a requirement in Wisconsin law on opening meetings.  The State Senate Clerk (not a partisan official) notes an exception to the 24 hour rule, so it is possible that no violation occurred.  This argument may still have some legal legs, but it is far from the slam dunk that some have portrayed it as.

4.  With passage in the assembly, the fight moves to legal challenges and the recall efforts.  Unfortunately, many people can't even name their state senator, so a successful recall effort will most likely be rooted in fear and anger.  These will be directed at the Governor, and channeled into the recall by those with interests in the outcome (including out of state interests).

5.  Recall of the missing Democrats will go on, but without the galvanizing figure of an unpopular Governor, may be at a disadvantage.  (See item #4.)

6.  There is a State Supreme Court election in April.  It could easily become (likely will be?) a referendum on Walker.  If you thought there was too much outside money in the court race before, I suspect you ain't seen nothing yet.  Oh, and if most people don't know their state senator, how many will know the court candidates?

7.   I don't think you can overstate the impact of the public perception of teachers and public schools on this debate.  You may show me studies that they are underpaid relative to the private sector, but I wonder if the differential shouldn't be greater given the desirable schedule and more secure employment (relative to the private sector) that teachers enjoy. (By the way, I think the opinion of teachers is much like people's opinion of congressmen - "my kid's teacher (congressman) is great, but it's all the others that are the problem.")

8.  No, I don't believe public sector wages collected as union dues amount to taxpayer funding of the Democratic party.  I do believe that having the state collect dues amounts to a taxpayer funded Accounts Receivable department for big labor.  Is it so bad that we put a stop to that?

9.  I'm sure the union will still accept dues checks every month.  Whether members are willing to send them or not is another question.  Perhaps we will get some real world data on just how much public sector workers value union membership.

10.  An end to public sector collective bargaining may end a 50 year tradition on Wisconsin, but federal employees and several states don't have collective bargaining for public sector workers, including states like Virginia and North Carolina.  Are they much worse off than Wisconsin?

11.  I don't believe this new law, or the proposed budget will "gut education" or "hurt kids".  His proposal will reduce per pupil spending from a little more than $10,000 to a little less than $10,000 (pdf).  If we cannot educate children at the K-12 level for a little less than $10,000 per child, I'd say we have a problem.

There is still much more to be said, and I don't see this as the end of the process by any means.

Be sure to let me know what you think.

Monopoly is in the eye of the beholder

I would bet that if you surveyed the protesters that have gathered in Madison in the recent weeks on the question of, "are monopolies a bad thing," you would find broad agreement that they are.

I'd be curious to know, then, what the protesters would make of this entry in the Concise Encyclopedia of Economics from the Center for Economics and Liberty:

Although labor unions have been celebrated in folk songs and stories as fearless champions of the downtrodden working man, this is not how economists see them. Economists who study unions—including some who are avowedly prounion—analyze them as cartels that raise wages above competitive levels by restricting the supply of labor to various firms and industries....

According to Harvard economists Richard Freeman and James Medoff, who look favorably on unions, “Most, if not all, unions have monopoly power, which they can use to raise wages above competitive levels” (1984, p. 6).

WI Public Sector Compensation: Examining the EPI Data

In my previous post on why the unions aren't winning the Wisconsin protests, Dean brought up a recent study showing that public sector workers in Wisconsin are undercompensated by 4.8%. The study was produced by EPI (Economic Policy Institute), which the New York Times describes as,"a nonprofit research organization supported by labor unions."  Predictably, some on the right, less sympathetic to organized labor, have denounced the study as flawed.

 

That both sides of this issue can look at the facts and draw opposing conclusions says more about statistics than anything else, but does this mean we should just throw up our hands and not even consider the question?  If I thought that was the right response, I wouldn't bother writing this blog.  So by giving EPI the benefit of the doubt and looking at the data, here is what I came away with regarding public sector worker compensation in Wisconsin.

1.  The 4.8% differential is not the same for all levels of education.  Workers with the least amount of education actually do better in the public sector than the private sector.  As education level increases, the wage discrepancy becomes greater.  I have seen this result reported elsewhere, and I believe it is relatively non-controversial.

2.  On average, public sector workers have more education than those in the private sector.

3.  This means that, on some level, the protesters in Madison are fighting for the wages of a workforce that is more highly educated on average.  Admittedly, calling the budget repair bill an, "assault on the middle class," is rhetorically more effective than, "these college graduates can't afford wage cuts."

4.  The percentage of teachers in the public sector work force have a dramatic impact on the results.  When you don't account for hours worked, EPI found that Wisconsin workers were, "undercompensated by 8.2%," but when they controlled for hours worked that number decreased to 4.8%.  EPI reports:

Full-time public employees work fewer annual hours, particularly employees with bachelor’s, master’s, and professional degrees (because many are teachers or university professors).

5.  To say that teachers work fewer hours than private sector workers is not a slight.  Having holidays and time off in the summer go with the job, the same way that working swing shift goes with some mill jobs.  Common sense would indicate that there is a value to having time off and that this value would show up as a discrepancy in compensation between public and private sector workers.  EPI downplays this with their control for hours worked.  My question on this, then, is whether all hours are treated equally.  Couldn't part of the compensation differential, even after adjusting for total hours worked, reflect the fact that teachers spend some of the most valuable hours away from work (i.e. at the holidays and in the summer)?

Finally, we should try to grapple with why it is that the compensation differential gets worse as education increases.  This reflects the fact that the rate of wage growth due to education is much higher in the private sector, but why should that be.  I see two possible reasons:

7.  First, for some jobs requiring high levels of education cultural and political norms are a barrier to paying compensation equal to the private sector.  As a society we may simply believe that these folks should be motivated, in part, by a desire to do public service.  For example, do you think we are ever going to pay SEC employees salaries comparable to what they could get on Wall Street?  I don't.  At the same time I suspect this is a relatively small factor in the compensation differential story.

8.  The other reason may, once again, come back to the presence of a large number of teachers in the public sector work force.  According to the EPI data 22% of state and local government workers had a master's degree, compared with only 5% of the private work force.  According to the US Department of Education, in 2007-2008 there were over 175,000 master's degrees conferred where the field of study was education.  Education has been the most popular field of study for master's degrees at least since 1970-1971.  The only other field that comes close is business.  Given that so many public sector workers work in the education field, the relative abundance of master's degrees in education could be contributing to the public sector wage differential.  It is true that EPI controls for level of education, but do they treat all master's degrees the same?  This would seem to be a mistake given education's popularity as a field for graduate level study.

While the discussion continues here in Wisconsin and beyond, you will no doubt continue to hear that public sector workers are undercompensated by 4.8%.  I hope that this discussion has shown you can be skeptical of that number, even without resorting to partisan attacks on the study's authors.  For me, the telling sing of the day when most public sector workers are undercompensated will come when we are no longer able to hire and retain workers.  In a timely bit of blogging from Eggster, we see that we are nowhere near that point yet. 

Why the unions aren't winning in one graphic

What you are looking at is the pay and benefits for a teacher in the village of Denmark, WI.  A small community in NE Wisconsin, where 46% of the tax levy goes to the school district.  As you can see, the total compensation for this teacher is over $77,000 per year.  You can also see that this person is able to command this level of compensation with just a bachelor's degree.  When you think about the number of hours of work required for this compensation, the difference between this teacher and a typical private sector worker becomes even more stark.

This information is available in a searchable database from the Post Crescent, you can check it out for yourself and see how teachers in your area compare.

When many private sector workers, including some with bachelor's degrees, look at this level of compensation, the benefits of collective bargaining for the public sector start to come into focus.  For many folks, the Governor's proposal to cut public sector employee pay by around 8% and end collective bargaining suddenly doesn't sound so scary after all.

Scott Walker's Budget Repair Bill

Reaction to Governor Scott Walker's budget repair bill continued today and is likely only a shadow of what we will see in the week ahead. While the bill itself contains a number of measures, it is the provisions stripping or limiting the collective bargaining rights of public sector employees that have caused the most anguish. If enacted, these provisions will be a tremendous change in the relationship between the state and public sector workers here in Wisconsin. Whatever the outcome, I believe this bill will have national implications.

Part of the furor over the bill arises from the fact that it was somewhat unexpected, Walker's comments downplaying this aspect notwithstanding. Yes, additional contributions toward pensions and health care by public employees were expected, but how many of us thought that within six weeks of taking office Governor Walker would propose legislation that essentially ends the power of public sector unions? I thought there was a possibility that Walker saw being governor as the culmination of his efforts, rather than just the start of them. This proposal shows how wrong I was.

By its nature this proposal will have a group of supporters who are already Walker fans, and a group of detractors who are already Walker foes. The numbers in the legislature point toward easy passage, but that doesn't necessarily mean the proposals will be supported by a majority of Wisconsin voters. Whether or not these proposals gain popular support and, by extension, whether or not Walker does, may rest with those who don't already have a dog in the fight.

Opponents of the bill have adopted at least three themes in attacking it: It is an assault on the middle class, it denies the history of labor relations and the gains for workers made possible by unions, and it is a power grab by the governor.

My wife and I consider ourselves middle class, and I doubt very much that either of us feels "assaulted" by the governor's proposal. It is quite possible many other middle class Wisconsinites will feel the same way. Not a good sign for opponents of the measures.

The proposals are a dramatic break with history in labor relations between the state and public workers for sure, but is that in and of itself a bad thing? Is it not possible that we need a change in the way this relationship works in order to meet the challenges of a 21st century economy?

As far as the gains made by unions throughout history to improve working conditions in this country, I don't doubt for a minute they are real. One could argue that many of these have become common features of the workplace, eliminating or greatly reducing the need for collective bargaining to secure any further changes. After all, we have yet to see a proposal from the Governor eliminating the 8 hour work day. Some of the Governor's opponents have adopted a rallying cry of "solidarity," but Milwaukee in 2011 is a far cry from Gdansk in 1980.

Finally, there is the power grab argument. This is the one that Walker has done the most to bolster with his somewhat cryptic comment about readying the Wisconsin National Guard. It is proper for chief executives to prepare for contingencies. If Walker was merely suggesting that the Guard could stand in for striking corrections officers, then his remark seems warranted. But if that is what he meant, then why didn't he say just that?

If, on the other hand, he meant something else, then I would urge him to be very careful. Calling out the National Guard on dissenting citizens is NOT commensurate with a small government philosophy. In case there was any question, public sector employees have not given up their first amendment rights (at least not outside of work hours).

If anyone tells you they are certain how this will turn out, don't believe it. It is simply too soon and this change is too big. Once, I thought Walker's handling of the structural budget deficit would define his governorship, with this proposal, however, that is clearly no longer the case.

Labor Pains for Barrett, Wisconsin

Milwaukee Mayor Tom Barrett has only recently announced his intention to run for governor, but already there are those arguing he can't both run for governor and push forward on a plan for mayoral control of the Milwaukee Public School system. This criticism though, isn't originating from Republicans, but rather from Barrett's fellow Democrats.

The Milwuakee Area Labor Council argues (H/T Fox Politics):

Members of his own party describe Tom Barrett’s decision Nov. 15 to run for governor while still struggling to rule the Milwaukee public schools as a calculated cynical gamble in opposition to the progressive forces he needs to turn out Democratic voters in Milwaukee.

While agreeing that Barrett is their best and best known chance in the race, they still blame the public divisiveness that will result on both the mayor and the governor who decided not to run, Jim Doyle.

I have argued previously that workers ought to have the right to organize and that union representation can play an important role in helping workers negotiate for market wages. A single worker faces difficulty in judging the market value of his labor and can be in a weak bargaining position relative to a potential employer.

I fear though that what we see these days from organized labor, especially in states like Wiscosin where it historically has been strong, is the last gasp of a decaying institution. Not an institution that changed so much as one that didn't realize times had changed. The exchange of our best working years for lifelong income and benefits has come and gone. As someone too young to have participated in that phase of our history there are times when I wish this were not so, but it is.

This example of labor opposition to a well-liked Democratic politician's plan to reform a troubled school district is just the latest example of labor moving beyond that vital role for which it was made and into protecting itself as an institution. It isn't the most egregious example, but a telling one nonetheless.

Regardless of who the next governor is, the labor movement in Wisconsin is going to have to decide if it wants to be forward-thinking and serve a leading role in transforming our economy to match the changing circumstances, or if it prefers to cling to what power it has left. The former could revitalize Milwaukee and Wisconsin, the latter will simply forestall the inevitable change and we will all suffer for it.

Can you be pro-market and pro-union?

The belief that labor unions can substantially raise real wages over the long run and for the whole working population is one of the great delusions of the present age...

All this does not mean that unions can serve no useful or legitimate function. The central function they can serve is to improve local working conditions and to assure that all of their members get the true market value of their services.

For the competition of workers for jobs, and of employers for workers does not work perfectly. Neither individual workers nor individual employers are likely to be fully informed concerning the conditions of the labor market. An individual worker may not know the true market value of his services to an employer. And he may be in a weak bargaining position.

That is Henry Hazlitt from his book Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics.

Unions knowing and carrying out their proper function is a critical part of the labor market. It is when they go beyond this true function that that results in bad outcomes, often for both employers and employees.

Hazlitt has impeccable free market credentials. This is from his biography on Mises.org:

If you want to know where American supporters of free markets learned economics, take a look at Economics in One Lesson by Henry Hazlitt. A brilliant and pithy work first published in 1946, at a time of rampant statism at home and abroad, it taught millions the bad consequences of putting government in charge of economic life.

Those within the labor movement would be well served to take Mr. Hazlitt's lesson to heart. And those that support free market principles would do well to remember that unions serve an important legitimate role in a truly free labor market.