Which Way America: War at Work or Working Together to Solve our Problems?

Solidarity with US unions

We are one campaign

29 March 2011

As part of the TUC's support for the US trade union movement's campaign to defend collective bargaining rights for public sector workers, we are publishing information on the background to the campaign every day in the fortnight before our day of solidarity on Monday 4 April.

Today, Thomas A. Kochan, George M. Bunker Professor, MIT Sloan School of Management and Co-Director, MIT Institute for Work and Employment Research argues for a different way to solve problems in the US economy.

Just when America needs all hands on deck working together to dig us out of the deepest economic crisis since the Great Depression, we are on the brink of what could be the largest prolonged labor war of our lifetime. The proximate trigger of the battles is the fiscal crises facing state and local governments.

But, unfortunately, instead of focusing on the real problem the Governor of Wisconsin and those following him are using the crisis to mount an all out ideological attack on worker rights, unions, and collective bargaining. Doing so not only diverts attention from the real problems facing the public sector, it forces the people of Wisconsin and potentially everyone in the country to choose sides and prepare for battle. If this approach spreads across the country the fragile recovery will be aborted and we will all be pulled back into the economic abyss.

A different approach is needed and I will argue here, based on the research my colleagues and I have done over the last thirty years and on personal experience in working with labor and management, that a different approach is possible?one that draws on the modern tools of negotiations, evidence-based problem solving, worker engagement, and union-management partnership.

But first let's be clear about the deeper issue at stake in Wisconsin that, if allowed to continue and spread, will lead the country to war. Wisconsin's governor and legislature have stripped employees of their rights to collective bargaining. Among other things requiring unions to justify their continued existence year after year will make it impossible for any union to represent its members in a stable and responsible fashion. In doing so, they are attacking what the member states of the International Labor Organization, including the U.S., have said is a fundamental human right, the freedom of association and the right to have an independent voice at work.

This is unacceptable. America must stand up for basic human rights at work as we stand for protecting human rights in all parts of society.

On the other hand, maybe this is just the wake-up call America needs to address the steady decline in labor policy that got us to this point. We have allowed worker rights to quietly and slowly erode in the private sector for a long time without recognizing its consequences or getting irate about it. Now we see it happening in bald and sudden form in the public sector. The 100,000 people who hit the streets of Madison may be the shock needed to see this problem clearly and to take action.

The first step in taking positive action is to define the problem accurately. This requires separating the ideology and rhetoric from the facts and evidence about the compensation of public employees and the role of unions and collective bargaining.

Let's start with the question of whether public service employees are overpaid relative to similarly educated workers in the private sector. Rutgers University professor Jeffrey Keefe and others have analyzed this issue both at a national level and within states like Wisconsin, New Jersey and others. Controlling for education, other standard human capital variables, and differences in hours worked, he found that nationally public sector workers earn 11.5% less than their private sector counterparts in wages and salaries. Taking fringe benefits into account shrinks the difference to 3.7%. Thus, public sector workers have lower wages and higher fringe benefits (yes pensions and health care benefits are the two standouts). But overall, they are not overpaid compared to comparably educated workers in the private sector.

There are important occupational differences in private-public sector wage differentials. The higher up the occupational and education ladder one goes, the more public sector workers are paid less than their private sector counterparts. Said differently, the floor on wages and benefits for service employees and others without a college degree more closely matches and for some groups starts at a modest 5 to 9 percent higher level than in the private sector and the ceilings are lower for public sector professional and managerial workers.

This pattern reflects the fact wages of less educated and less skilled private sector workers have been driven down by the loss of good manufacturing jobs and the weak bargaining power of entry level service workers?think of this as the Walmart effect? while salaries at the top of private sector firms have exploded. Over 50 percent of the productivity growth of the past two decades has gone to the top one percent of the workforce i.e., private sector CEOs, traders in financial services, and other high level professionals. Through collective bargaining the public sector wage distribution has remained more compact and served as a force against further income inequality in America.

What about benefits? As the numbers reported above, the problem is not the overall level of benefits?total compensation including benefits still puts public employee compensation below most of their private sector counterparts. The problems lie in the inconsistent and improper funding of benefits, losses in pension investment incomes experienced during the Great Recession, and benefit formulas that base retirement incomes on the last few years of service and lead to excessive overtime and other abuses. These problems cut across states with and without public sector collective bargaining and union and nonunionized employees within states. Public employees also, on average, pay a smaller percentage of their health care premiums than most private sector employees. These issues all need attention regardless of union or nonunion status.

But is collective bargaining blameless? No. The incremental bargaining process observed at the local level is too politically constrained, too incremental, and too slow to solve the rising health care costs and growing pension liabilities facing local and state governments today. In Massachusetts, for example, the governor has given municipalities and their unions two years to try to negotiate shifting from the various health care plans in place to the less costly but still comprehensive state-wide program. But little progress was made.

Teacher unions have also been slow to take up the call for education reform and are only now doing so after considerable pressure and some significant incentives from the Obama Administration's 'Race to the Top' and 'School Improvement' mandates and grants. The public will no longer tolerate seniority, tenure, or other practices that protect poor teachers at the expense of their students and others eager to step in and bring fresh approaches and energy to the teaching profession.

So the real problem lies in how to get labor and management in the public sector to step up to these problems and not let the ideological and misguided attacks on worker rights lead us into chaos.

How? We need to learn from experiences in bringing about innovations through collective bargaining in the private and public sectors. My experience convinces me that if we apply a modern approach to negotiations?evidence-based, transparent, problem solving (we call this 'interest based' negotiations) we can address the challenges.

The clearest private sector example of what is possible comes from a more than decade-long labor management partnership between the health care insurer and provider Kaiser Permanente and the coalition of unions that represent more than 100,000 of its employees. The partnership was born out of crisis in 1997 when McKinsey consultants recommended Kaiser Permanente split up to avoid further losses and to intensify demands for wage and benefit concessions.

Instead, labor and management leaders decided to try working together and formed a partnership that turned the organization's finances around, supported steady growth in wages, increased employee and patient satisfaction, and put hundreds of teams of front line employees, doctors, and supervisors to work on improving patient care. They negotiated three nation-wide labor contracts each using state of the art interest-based problem solving techniques, data sharing, and decision-making.

The Kaiser case is not unique. Over the past two decades our students and colleagues have shown that similar workplace and labor management innovations in industries as varied as health care, airlines, steel, and telecommunications lead to increased productivity, service quality, and a more satisfied and fairly compensated workforce. One estimate drawn from a large scale study in manufacturing suggests a 15-25 percent productivity premium can be realized when labor and management work together in these ways.

The recent merger of multiple transportation agencies, workforces, and unions, into a single integrated department of transportation in Massachusetts serves as a public sector example of how the modern tools of negotiations and worker engagement can help achieve significant change and innovation. This effort was also born out of crisis. The transportation reform law creating the new agency called for large wage cuts (more highly paid Massachusetts Turnpike employees would be placed on the state schedule and receive considerably lower pay). Implementing the statute as written would have violated basic norms of fairness to these employees, bypassed collective bargaining, and saddled the management of the new agency with a divided, angry, and ill-motivated workforce and triggered a battle among state government and former Turnpike unions over who, if anyone, would represent employees of the new agency.

To avoid these consequences, a new union coalition was formed and agreed to bargain as a single entity. Management agreed to negotiate with the coalition in return for full freedom to integrate the workforce without regard to traditional jurisdictional boundaries and work rules. A multi-party negotiation process then ensued that produced an agreement that 'red circled' (froze in place) the wages of the higher paid employees in return for the right to hire new employees on the lower state salary schedule. The parties called this the 'Grand Bargain' because nobody thought it could be accomplished.

The agreement also created an operations' improvement program in which ten percent of the workforce savings achieved would go to into an equity fund to help close the wage gaps between employees doing similar work. Joint labor-management committees were created and chartered to address the myriad of issues that will arise as the integration process moves forward and to further rationalize and modernize the job structures inherited from the old state system. In short, this negotiations process established the structures, processes, and alignment of interests needed to build an efficient, indeed model, public transportation system and organization.

What lessons should be taken away from these examples? First, determined leadership and political courage are needed to break out of the status-quo or incremental pace of change normally achieved through collective bargaining or to avoid the anger, resistance, and conflicts that result if legislatures try to impose unilateral wage and benefit cuts and/or take away the right to union representation and collective bargaining. Second, collective bargaining can contribute to reform if it is transparent, data driven, and focused on addressing basic interests and norms of fairness. And finally, negotiating an agreement is only the first step in realizing the benefits of reform. Making reforms really pay off requires on-going leadership from public sector executives and union leaders, and the engagement of the full workforce.

How can we apply these lessons in states across the country and avert the pending labor wars? Let me suggest a three step process for state government and labor leaders to put these lessons to work.

• Get your state-specific facts right about the costs of public sector wages and benefits and their future funding liabilities and communicate these findings to the public. Doing so will end the scapegoating of unions and collective bargaining and put the real problems on the table for all to see.
• Use these findings as inputs into a state-wide 'Grand Bargain' similar to the approach taken in the transportation example described above. Bring together state officials, representatives of all public sector unions, and neutral facilitators experienced in interest-based negotiations and instruct them to negotiate solutions to the problems identified and to communicate the results to the public.
• Use the lessons learned from this experience to carry out an evidence-based analysis of what else needs to be done to modernize the state's public sector bargaining practices to fit the needs of today's more transparent and financially strapped environment while remaining true to our values of freedom of association and voice at work. Explore how to transform workplace practices and labor management relations to realize the potential improvements in productivity and service quality the benchmark examples from the private sector have achieved. This will require on-going engagement of front line employees, supervisors, and managers working together.

If this approach works for these immediate questions, perhaps it can be used to achieve education reform and to address the deeper questions about how to adequately fund and reform the full range of public services. Who knows, it might even teach private sector management and labor leaders how to reform their relationships before the 100,000 in the streets of Madison escalate into millions across the country.

A longer paper reporting on the research summarized here can be found on the Employment Policy Research Network website: See 'Getting it Right: The Current Debate over Public Sector Unions and Collective Bargaining: Evidence and Policy Options.' www.employmentpolicy.org. An abridged version of the paper can be found at www.Bostonreview.net. The views expressed here are only those of the author.