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Brooks Wilson's Economics Blog: Freezing Union Wages in California

Monday, May 11, 2009

Freezing Union Wages in California

Evan Halper, writing for the Los Angeles Times in "U.S. threatens to rescind stimulus money over wage cuts," describes how the Obama administration is threatening to cut $6.8 billion in stimulus if the state of California does not restore salary cuts to members of the Service Employees International Union and the United Domestic Workers which would save the state $74 million.  The wages of the union members would fall from a maximum of $12.10 per hour to $10.10.  The Obama administration believes that the cuts violate provisions in the American Recovery and Reinvestment Act (the stimulus). 

The story illustrates at least three faults of the stimulus bill.  First and foremost, it violates the principle of federalism which divides governing authority between different levels of government.  The legislators that passed the bill and President Obama who signed it show hubris assuming that they understand the California budgetary constraints better than California's elected representatives.  They also favored union members, a special interest group, over the taxpayers of California.  Finally, a great deal of economic evidence suggests that freezing wages at high levels by both the Hoover and Roosevelt administrations contributed to the length of the Great Depression.  As Lest Chandler (America's Greatest Depression: 1929-1941, Harper and Row, 1970) notes,
During the first years of the depression, decreases of money wage rates were quite limited in both numbers and amounts.  Wage cuts in a depression usually come only after a delay, but this time President Hoover launched a campaign to prevent them.  Summoning to the White House representatives of both employers and labor, he extracted promises from employers that they would not initiate wage reductions, and promises from labor leaders that there would be no moves for wage increases beyond those already in process.  He emphasized the desirability of maintaining wage rates because of the human considerations involved and also as a means of maintaining the consuming power of the country.  He seems to have paid little attention to wage rates as a determinant of costs of production, and to the possibility that the rise of real wage rates accompanying decreases in the prices of output might actually decrease total employment. 
Harold Cole and Lee Ohanian in an article titled "How the Government Prolonged the Depression," written for the Wall Street Journal on February 2, 2009 ask
So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.
I don't want to exaggerate the harm I believe the administration's interference with California government will cause.  This violation of federalism is small and has precedent, as does the support of unions over taxpayers or consumers.  The wages of these union workers is an infinitesimal fraction of the nation's wages.  But in each case, the administration's actions move good governance and the economy in the wrong directions. 

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