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Just when America needs everyone working together to resolve the severest economic crisis since the Great Depression, we are on the brink of what could be the largest prolonged labor war of our lifetimes, triggered by the fiscal crises facing state and local governments. But that outcome can be avoided. We need to draw on the most effective tools of labor negotiations—evidence-based problem solving, worker engagement, and union-management partnership.
The current labor battle began in Wisconsin, where, after a dramatic standoff with state Democrats and pro-union demonstrators, Governor Scott Walker and the state legislature stripped public employees of their rights to collective bargaining. (A circuit court judge has since issued a temporary restraining order, stopping the measure from taking effect.) Much is at stake nationally in Wisconsin. If other states follow, unions will be forced to justify their continued existence year after year, making it impossible for them to represent their members in a stable and responsible fashion. Walker and his supporters have attacked what the United States and the other nations of the Governing Body of the International Labor Organization have called a fundamental human right: the right to associate freely and have an independent voice at work.
What happened in Wisconsin was, to some extent, foreseeable: American workers have suffered a steady decline in labor policy. We have allowed worker rights to erode in the private sector without recognizing the consequences, let alone protesting. Now we see the same thing happening baldly and suddenly in the public sector. The 100,000 people who hit the streets of Madison may provide the shock needed to see this problem clearly and to act.
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The heated debate in Wisconsin was predicated on the governor’s claim that, thanks to their collective bargaining rights, public-service employees are overpaid relative to similarly educated workers in the private sector. Economist Jeffrey Keefe and others have done the comparisons at both at a national level and within states such as Wisconsin and found that public-sector workers nationwide earn 11.5 percent less than their similarly educated private-sector counterparts in wages and salaries. Taking fringe benefits into account shrinks the difference to 3.7 percent, with pensions and health care benefits the two standouts. So, despite their greater benefits, public workers actually cost their employers less than private-sector workers do.
The wage disparities between private- and public-sector employees reflect important occupational differences. The higher a private-sector worker lands on the educational and occupational ladder, the more he or she is paid compared to a public sector counterpart: income ceilings are much lower for public-sector professional and managerial workers. On the other hand, the floor on wages and benefits for public- and private-sector employees without a college degree more closely matches, with the compensation for some public-sector occupations starting only 5–9 percent higher than in the private sector.
This pattern reflects two trends. First, the loss of manufacturing jobs and the weak bargaining power of entry-level service workers have depressed the wages of less educated and less skilled private-sector workers. Think of this as the Walmart effect. Second, salaries at the top of private-sector firms have exploded. More than 50 percent of the income derived from 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 bulwark against further income inequality in the United States.
What about benefits? As the numbers above show, the problem is not the overall level of benefits—the total compensation of public-sector employees trails that of their private-sector counterparts. The problem stems from inconsistent and improper funding of benefits, losses in pension investments during the Great Recession, and reliance on benefit formulas that base retirement incomes on the last few years of service and incentivize excessive overtime and other abuses. These factors cut across states with and without public-sector collective bargaining and across unionized and nonunionized employees within states. Public employees also, on average, pay a smaller percentage of their health-care premiums than do most private-sector employees. All these issues need attention regardless of union or nonunion status.
Innovations in labor-management negotiations have improved productivity, quality of service, and worker satisfaction.
Can we depend on collective bargaining, on its own, to resolve the resulting budgetary crises? No. At the local level, the bargaining process is too politically constrained, too incremental, and too slow to solve the rising health-care costs and growing pension liabilities facing city and state governments. In Massachusetts, for example, the governor gave municipalities and their unions two years to negotiate a shift from their various health-care plans to the less costly but still comprehensive statewide program. But little progress was made. Efforts are now underway to work out a state-wide transition either through a single state-wide labor management negotiation or via legislation.
Teacher unions have also been slow to accept the call for education reform and are doing so now only after considerable pressure and incentives from the Obama Administration’s Race to the Top and School Improvement programs. The public will no longer tolerate seniority, tenure, or other barriers that protect poor teachers from competition, at the expense of their students.
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Our challenge is to get labor and management in the public sector to face these problems without being distracted by misguided ideological attacks on worker rights. To do so, we need to apply an approach to negotiations that is “interest-based” (i.e., focused on finding a mutually beneficial resolution based on each party’s interests, as opposed to more traditional “positional” bargaining), problem-solving, transparent, and grounded in evidence.
The clearest private-sector example of this approach comes from the 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 arose in 1997 when McKinsey consultants recommended Kaiser Permanente split up to avoid further losses and to encourage wage and benefit concessions.
Instead, labor and management leaders decided to try working together. Three nationwide labor contracts were negotiated using interest-based processes. For example, the parties started by using multiple task forces to collect data and explore options; management shared financial data and the unions shared membership survey data needed to evaluate options; and joint labor-management teams worked together on issues as varied as marketing strategy, product quality, work-life balance, and performance-based pay. By working together in this way the partnership helped turn the organization’s finances around, supported steady growth in wages, increased employee and patient satisfaction, and improved patient care.
The Kaiser case is not unique. Over the past two decades, innovations in workplace and labor-management negotiations in industries as varied as health care, airlines, steel, and telecommunications have generated increased productivity, improved quality of service, and a more satisfied and fairly compensated workforce. One large-scale study in manufacturing estimates that by working together and engaging front-line employees in improvement efforts unions and companies can realize a 15–25 percent productivity premium.
Massachusetts’s recent merger of multiple transportation agencies, workforces, and unions, into a single integrated department of transportation offers a public-sector example of effective negotiations. The law creating the new agency called for large wage cuts: more highly paid Massachusetts Turnpike employees would be placed on the less generous state schedule and consequently receive lower pay. Implementing the statute as written would have bypassed collective bargaining, violated basic norms of fairness, saddled the new agency’s management with a divided, angry, and ill-motivated workforce, and triggered a battle among the various unions over who, if anyone, would represent employees.
To avoid these consequences, a new union coalition formed and bargained 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 multiparty negotiation ensued, producing 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 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 10 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 issues that will arise as the integration proceeds and to modernize the job structures inherited from the old state system. In short, this negotiation established the framework and alignment of interests needed to build an efficient, indeed model, organization for public transportation.
What lessons should we take from these examples? First, leadership and political courage are needed to escape the slow rate of change endemic to collective bargaining and the labor strife sparked by legislatures imposing wage and benefit cuts and eliminating the right to union representation. 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 of reform. True success requires ongoing 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:
1. Get your state-specific facts right. Know the real costs of public-sector wages and benefits and the future funding liabilities involved, and communicate this knowledge to the public. Doing so will end the scapegoating of unions and collective bargaining and reveal the real problems for all to see.
2. Use these findings to negotiate a statewide “grand bargain.” Bring together state officials, representatives of all public-sector unions, and neutral facilitators, and instruct them to negotiate solutions to the problems identified and to communicate the results to the public.
3. Use the lessons learned from this experience to further modernize the state’s public-sector bargaining practices to fit the needs of today’s financially strapped environment while remaining true to our values of freedom of association and expression at work. Explore how to transform workplace practices and labor-management relations to improve productivity and service. This will require ongoing engagement of front-line employees, supervisors, and managers.
If this approach works for these immediate problems, perhaps it can also be applied to education and the full range of public services. Who knows, it might even teach private-sector management and labor leaders how to improve their relationships. What is clear is that without an improved approach to labor-management negotiations, the protests in Madison will not be the last.
Thomas Kochan is the Co-Director of the Institute for Work and Employment Research and the George M. Bunker Professor at the MIT Sloan School of Management. He is the co-author of Shaping the Future of Work: A Handbook for Action and a New Social Contract.
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