7.5_Unions, rent seeking, and corruption_UFP

Urban Fiscal Policy Overview

  • Topic: Unions, rent seeking, and corruption according to Professor Fernando Ferreira

Topics Covered

  • Unions

    • Public sector unions and right-to-work laws

    • Rent seeking and unfunded pension liabilities

  • Corruption

    • Measurement methods and ranking of US cities

    • Audits in Brazil and Italy

    • Patronage in Brazil

Union Facts

  • Definition: Labor unions are associations of workers advocating for their interests through collective bargaining agreements.

  • Current Unionization Stats:

    • 10% of US workforce unionized.

    • Breakdown: 6% private sector, 33% public sector.

    • Major unions: Police, firefighters, teachers, municipal workers.

    • States with the most union membership: CA, NY, IL, PA, MI, OH, WA.

Unionization Trends

  • Graph Analysis (Bureau of Labor Statistics, 2024): Trends from 1973 to 2023 show variations in unionization rates among all, private, and public sector workers.

Historical Context of Unions

  • Increased activity from early 1900s, solidified by the National Labor Relations Act (NLRA) in 1935.

  • Taft-Hartley Act (1947): Modified union rights allowing right-to-work laws and weakened unions' abilities to charge fees.

Right-to-Work States

  • Definition: Union membership not mandatory for employment.

  • Consequences: Reduced union power and bargaining abilities leading to lower funding.

Public Sector Negotiations

  • Focus Areas:

    • Current earnings (wages, benefits, allowances for remote work)

    • Future earnings (wage growth, pensions)

    • Type/Quantity of work expected from employees.

Rent-Seeking Behavior

  • Definition: Actions taken by a party aiming to gain economic rents through political manipulation rather than market strategies.

  • Union funding is politically significant, allowing unions to influence negotiations through campaign contributions.

Unfunded Municipal Pensions

  • Significant issue cited by Warren Buffett regarding unsustainable obligations (over $7 trillion in unfunded liabilities versus $4 trillion in municipal bond debt).

Types of Pensions

  • Defined Benefit: Promises predetermined benefits.

  • Defined Contribution: Benefits vary based on contributions and investment performance.

  • 90% of municipal pensions are defined benefit plans.

Reasons for Underfunded Pensions

  1. Overpromising and Underfunding: Strain from negotiating with unions.

  2. Demographic Challenges: Increasing retiree-to-worker ratio.

Potential Solutions for Pensions

  • Transition to defined-contribution systems.

  • Increase worker contributions or local taxes.

  • Renegotiate obligations for feasibility.

Corruption Overview

  • Manifestations: Direct theft, procurement fraud, electoral manipulation, nepotism.

  • Hidden nature makes magnitude difficult to discern.

Measuring Corruption

  • Corruption Perceptions Index (CPI): Surveys assessing public perceptions of corruption in governance.

  • Conviction records provide another measurement lens.

Audit Findings in Brazil and Italy

  • Brazil conducted random audits to evaluate local spending and identify irregularities.

  • Italy's reforms improved auditor independence and fiscal outcomes.

Patronage in Brazil

  • Increased public sector share of GDP, leading to potential corruption due to well-compensated public jobs.

  • Employment predominantly managed by political affiliations.

Conclusion on Corruption and Solutions

  • Corruption significantly impacts city fiscal health and service quality.

  • Importance of transparency and established auditing practices to deter corruption.