I’ve been thinking a lot recently about the current issues of political economy, and I’m trying to kind of grasp the current class make-up of our society. I would argue that the old class make-up of classical political economy of laborers, capitalists, and landlords have basically all fused into an insulated producer/consumer class where the old class boundaries have basically blurred, and now have become analogous to the laboring class of classical political economy. The new class of financial capitalists are now the equivolent to the capitalists of classical political economy. The government sector (both employees and contractors) are now the new landlords. This actually I believe is to an extent the class structure developed by Keynes (although I can’t find any evidence of him explicitly stating it) as an extension of Malthus’ belief in gluts, because he believed the government to be the class that would help alleviate gluts, much in the way Malthus believed the landlord class could do the same.
So now that the classes have been established I’d like to take a look at the role of labor unions, first in the private sector and secondly in the public sector. In the private sector labor unions play a very important role in ensuring that wages of the laborers rise proportionally with the wages of their employers by negotiating their portion of economic profit, or the producer surplus. The producer surplus, is not inherently entitled to the employer, because their compensation for risk and opportunity should already be factored into supply schedule. Thus, when labor unions negotiate for higher wages and benefits, they are negotiating for money from the producer surplus, which does not inherently belong to anyone.
But what then, are public employees negotiating over? Tax revenue is what pays their wages, there is no actual market for the goods they sell, since the government doesn’t sell its goods and services in a market (at least most of the time). When a public employee union comes to the negotiating table they aren’t negotiating over a producer surplus, they are indeed negotiating over tax revenue. The general belief is that the employers (either publicly elected officials or sometimes upper management) negotiating over wages and benefits with the union have nothing to lose over allowing employees more generous wages and benefits. However, this is a misconception, publicly elected officials have to be concerned about how these wages and benefits will affect the budgets, because budget shortfalls will either lead to cuts in services or tax hikes (especially at the state and local level, where balanced budgets are almost mandatory). These officials generally have been very myopic however when negotiating wages and benefits, they choose to reduce real wages in exchange for higher benefits, kicking the can down the road. This had been a sustainable method until the recent recession, when decreased revenues made it difficult to honor those benefits.
In short, public employee unions however are very necessary, because without them their wages and benefits would be subject entirely to the whims of politicians, and in a world where a good and efficient government is a priority, this can lead to disastrous results (under qualified government labor force, worsening of recessions due to local governments inability to engage in countercyclical spending).