March 2011

How Massachusetts Can Stop the Public-Sector Virus By Thomas A. Kochan (MIT Sloan School of Management)

America is in the early stages of what are these the causes or convenient This Policy Brief is based on remarks could be the largest labor protest of scapegoats and targets? made by Professor Thomas A. Kochan our lifetime. Starting in Wisconsin, at “Collective Bargains: Rebuilding and Let me be clear about the deeper issue Repairing Public Sector Labor Relations the battle over public-sector wages, at stake in these debates that give them in Diffi cult Times,” a Boston 101 event on benefi ts, and collective bargaining February 23, 2011. A full video of the event such a viral character. Wisconsin’s can be found at http://www.hks.harvard. rights is now spreading like a virus to governor would strip employees of edu/centers/rappaport/events-and-news/ Indiana, Ohio, New Jersey, and God audio-and-video-clips/collective-bargains- their rights to collective bargaining rebuilding-and-repairing-public-sector- knows where next. So, like exposure and make it essentially impossible labor-relations-in-diffi cult-times. to any virus, we have two questions for any union to represent its Thomas A. Kochan on our mind: Will we get it here in Thomas A. Kochan is the George M. Bunker members in a stable and responsible Professor at MIT Sloan School of Massachusetts? Is there a treatment fashion. In doing so, he is attacking a Management. He is also co-Director at the that makes us immune and stops it MIT Institute for Work and Employment fundamental human right, the freedom Research. from spreading around the country? of association and the right to have © 2011 by Professor Thomas A. Kochan. The contents refl ect the views of the author I believe we have within our own an independent voice at work. This (who is responsible for the facts and experience the potential treatment and is not only unacceptable; I hope we accuracy of the research herein) and do not represent the offi cial views or policies of the immunity. But we must act proactively will have the courage to call it un- Rappaport Institute, Harvard University, or now. We can build on our own positive American. America must stand up for the Employment Policy Research Network. experiences in confronting public- basic human rights at work as we do in More information on both the Rappaport Institute for Greater Boston and the sector challenges over the past year all parts of society. Employment Policy Research Network can be found at: and chart a new course for tackling This is a teachable moment, but we public-sector challenges here, and Rappaport Institute for Greater Boston have to get the lesson right. We have Harvard Kennedy School in doing so lead the nation on a allowed worker rights to quietly and 79 John F. Kennedy Street Cambridge, MA 02138 new course for public-sector labor- slowly erode in the private sector for management relations. The way to http://www.rappaportinstitute.org a long time without recognizing its 617-495-5091 do so is to put the modern tools of consequences or getting irate about Employment Policy Research Network negotiations, problem solving, and 121 Labor and Employment Relations Bldg. it. Now we see it happening in a bald 504 East Armory Avenue political leadership to work. I will give and sudden form in the public sector. Champaign, IL 61820 it a name: Call it the Grand Bargain The 70,000 people in the streets http://www.employmentpolicy.org (217) 333-0072 2.0. of Madison should be a wake-up The proximate trigger of the battles call. When people’s basic rights are going on around the nation is the fi scal attacked they will react. So the virus crises state and local governments on our doorstep will come in, if we do are experiencing. Out-of-control not get our house in order. public-sector wages, health care costs, Our approach has to start by unions, and collective bargaining are getting the facts right. Public-sector being signaled out as the causes. But employees are not overpaid relative How Massachusetts Can Stop the Public-Sector Virus Rappaport Institute | EPRN POLICY BRIEFS

to their private sector counterparts. Rutgers than highly paid professionals. In doing so it University Professor Jeffrey Keefe has done helps reduce income inequality. This has been the analysis both at a national level and known to be an effect since the 1980s research within states like Wisconsin, New Jersey, by Harvard colleagues Richard Freeman and and others.1 Controlling for education and James Medoff, and now we see the same effects other standard human-capital variables, he in the public-sector studies cited above.3 found that nationally, public-sector workers What about arbitration? In a recent nation- earn 11.5 percent less than their private- wide study I found that arbitration settlements sector counterparts in wages and salaries. basically mirror outcomes negotiated in states Taking fringe benefi ts into account shrinks without arbitration and those settled voluntarily the difference to 3.7 percent. The same is in collective bargaining. This is not surprising, true in Massachusetts. Jeffrey Thompson because most arbitration statutes require and John Schmitt from the University of arbitrators to use these comparisons along with Massachusetts’ Political Economy Research cost of living, ability to pay, and other objective Institute and Center for Economic and Policy factors in shaping their awards.4 Research found public employees’ wages are approximately 2.3 percent less than their But are collective bargaining and arbitration private-sector counterparts and their total blameless? No. The incremental bargaining process observed at the local level is too The 70,000 people in the streets politically constrained, too incremental, and too of Madison should be a wake-up slow to solve the problems of rising health-care call. When people’s basic rights costs and growing pension liabilities facing are attacked, they will react. So local and state governments. Despite the need to reign in health care costs, few municipalities, the virus on our doorstep will despite heroic efforts in places like Arlington, come in, if we do not get our took up the Governor’s proposal to negotiate house in order. their way into the state’s less expensive insurance program (called the General compensation is 1.4 percent less than their Insurance Commission or GIC). A stronger private-sector equivalently educated workers.2 shock is needed for the system to change. It Thus, public-sector workers have lower wages needs a Grand Bargain 2.0. and higher fringe benefi ts (yes, pensions and So how to proceed? I think we can learn health-care benefi ts are the two standouts). But from two recent experiences we’ve had in overall, they are not overpaid compared to the public-sector disputes in Massachusetts. Both private sector. No easy scapegoat here. examples convince me that if we apply a So are the public-sector collective bargaining modern approach to negotiations—evidence- and/or the arbitration process that governs based, transparent, problem solving (we call some public-sector disputes the problems? this “interest-based negotiations”) we can I have studied these processes intensively, address the challenges. fi rst in Wisconsin and then in New York State The fi rst example is last summer’s highly and nationally. Here is a quick summary of visible dispute over the Boston fi refi ghters’ what we know. First, collective bargaining arbitration award. As we recall, that award protects wages of lower paid employees more offended the public by providing a wage 2 How Massachusetts Can Stop the Public-Sector Virus Rappaport Institute | EPRN POLICY BRIEFS

increase as a reward for mandatory drug and just that. A negotiated resolution was reached alcohol testing. The public essentially said loud that added a fi fth year to the agreement and and clear: “Give me a break, you mean we reduced the costs of the increase and deferred have to pay these guys to come to work clean implementing it into the future. and sober?” At the same time the Mayor of This was a victory for all and especially for the Boston went on a media campaign arguing the public. The community held the parties’ feet wage increase was way above the norm—19 to the fi re, so to speak, until a better outcome percent over four years. was negotiated. The lesson here is we are in a The public pressure led the Boston City transparent, media-intensive world. Fairness Council to call for a study of the award. I did and public acceptability ruled the day. the study and came to two conclusions: The A second example involves a complex merger basic arbitration award matched the negotiated of the state’s different transportation agencies. police settlement for 2006-2010 and amounted This involved integrating multiple workforces, to essentially a 14 percent increase for those organizations, and unions from the Mass four years. Second, it was the quid pro quo for Turnpike, Tobin Bridge, Registry of Motor the drug and alcohol testing that pushed up the Vehicles, Mass. Aeronautics Commission, and Highway Department into a single The incremental bargaining Massachusetts Department of Transportation process observed at the (MassDOT). local level is too politically The 2009 transportation reform law creating constrained, too incremental, and the new agency called for Draconian wage cuts too slow to solve the problems (more highly paid Turnpike employees would of rising health care costs and be placed on the state schedule and receive growing pension liabilities facing the considerably lower pay). Implementing local and state governments. the statute as written would have violated basic norms of fairness to these employees, bypassed collective bargaining, and saddled costs in the future to reach 19 percent. That is, MassDOT management with a divided, angry, if left standing as called for in the award, the and ill-motivated workforce. It would also total costs of the package with compounding have triggered a nasty battle among state interest would approximate 19 percent over government and former Turnpike unions over fi ve, not four, years. So the nub of the problem who, if anyone, would represent MassDOT was the 2.5 percent quid pro quo for drug and employees. This would hardly have encouraged alcohol testing. If we focused on that specifi c employees to work together to generate the issue, perhaps the public’s sense of fairness, savings anticipated from integration. The the city’s need for a fi scally responsible wage blunt approach of the statute required new settlement, and the fi refi ghters’ legitimate need approaches to solve the representation and pay for an equitable settlement, could be achieved. equity puzzles created by the legislation. As a result of this analysis, I urged the Council Thanks to the leadership of Robert Haynes, to neither accept nor reject the award, but to go President of the Massachusetts AFL-CIO, a back and renegotiate it with the fi refi ghters and new union coalition was formed and agreed the mayor. To the City Council’s credit, it did to bargain as a single entity. MassDOT agreed 3 How Massachusetts Can Stop the Public-Sector Virus Rappaport Institute | EPRN POLICY BRIEFS

to negotiate with the coalition and to preserve inherited from the state system. In short, prevailing union affi liations and representation it provides the framework, processes, and rights in return for full freedom to integrate alignment of interests needed to build a model the workforce without regard to traditional public transportation system and organization. jurisdictional boundaries. What lessons should be taken away from Early in the process, Secretary of these two cases for other public service Transportation Jeffrey Mullan and his team reforms? First, determined leadership and recognized that cutting the wages of employees political courage are needed to break out was never going to work, either to get an of the status-quo or incremental pace of agreement or to motivate the workforce. change normally achieved through collective Instead, MassDOT agreed to “red circle” or bargaining, arbitration, or legislatively freeze rather than impose cuts in wages of mandated or management-driven organizational Turnpike employees, in return for the right to restructuring. Second, collective bargaining hire new employees on the lower state salary can contribute to reform if it is transparent, schedule. The complex and costly work rules data driven, and focused on addressing basic from the former Turnpike contracts would also interests and norms of fairness. This is no give way to more fl exible and more effi cient longer “your father’s labor relations” at work in ways of managing the new organization and the back room with deals that sweep problems getting the work done. under the table or that perpetuate work rules In the end an agreement was reached that that infl ate costs with little or no benefi t to the positions the new MassDOT to achieve the effi ciencies envisioned in the reform Determined leadership and legislation. At the same time, it pays due political courage are needed respect to the rights and equity stakes to break out of the status- of incumbent employees. Moreover, the quo or incremental pace of agreement opens a new door in the delivery change normally achieved of public services and public employee through collective bargaining, compensation by creating an operations’ arbitration, or legislatively improvement program in which 10 percent of mandated or management- the workforce savings achieved (not savings in benefi ts, for example) will go to into an equity driven organizational fund to help close the wage gaps between restructuring. employees doing similar work. Aligning employee and employer interests in this way is public. And fi nally, negotiating agreements a breakthrough in public service compensation like these is only the fi rst step in realizing and management, one that would be good to the benefi ts of reform. Making reforms really replicate in other public-sector settings. pay off will require on-going leadership from public-sector executives and union leaders, and The agreement also sets up a number of the engagement of the full workforce. joint labor-management committees to address the myriad of issues that will come So, how can we apply these lessons and shape up as the integration process moves forward Grand Bargain 2.0 to address the real problems and provides for a joint process to further in the public-sector? rationalize and modernize the job structures 4 How Massachusetts Can Stop the Public-Sector Virus Rappaport Institute | EPRN POLICY BRIEFS

Let me suggest a three-step process. Endnotes 1 1. Get the facts right about the real costs See Jeffrey Keefe, “Are Wisconsin Employees of public-sector wages and benefi ts Over-Compensated?” Economic Policy Institute and the future funding liabilities and Briefi ng Paper #290, February 2011, Online communicate these fi ndings to the at http://epi.3cdn.net/9e237c56096a8e4904_ public. These data can be assembled rkm6b9hn1.pdf or http://www. in short order since much of the employmentpolicy.org/sites/eprn.cloud.ojctech. background research has already been com/fi les/wisconsin.pdf and Jeffrey Keefe, done. “Debunking the Myth of the Overcompensated Public Employee,” Economic Policy Institute 2. Use these fi ndings as inputs into “Grand Briefi ng Paper #276, September 2010, Online Bargain 2.0” by bringing together at http://epi.3cdn.net/8808ae41b085032c0b_8 state offi cials, representatives of all um6bh5ty.pdf http://www.employmentpolicy. public-sector unions, and neutral org/sites/eprn.cloud.ojctech.com/fi les/ facilitators experienced in interest- Debunking%20the%20Myth.pdf based negotiations (there is no shortage 2 of such experts here in Massachusetts) See Jeffrey Thompson and John Schmitt, “The and instruct them to negotiate solutions Wage Penalty for State and Local Government to the problems and to communicate Employees in New England,” Political their solutions to the public. Economy Research Institute and Center for Economic and Policy Research, Working Paper 3. Use the lessons learned from this #232, September 2010, online at http://www. experience to carry out an evidence- peri.umass.edu/fi leadmin/pdf/working_papers/ based analysis of what else can be working_papers_201-250/WP233.pdf. done to modernize our state’s public- 3 sector bargaining practices to fi t the See Richard Freeman and James Medoff, needs of today’s more transparent and What Do Unions Do? NY: Basic Books, 1984. fi nancially strapped environment while 4 See Thomas Kochan, David B. Lipsky, Mary remaining true to our values. Newhart, and Alan Benson, “The Long Haul If we take these steps, Massachusetts will not Effects Of Interest Arbitration: The Case Of only stop the virus at our doorstep, but may New York State’s Taylor Law,” Industrial & just serve as the vaccine that can be applied Labor Relations Review. Vol. 63, No. 4, pp. nationwide to protect the current population 565-584. and generations to come. If this approach works for health care and pensions, perhaps it can be applied to education reform and other public services and become the model for how to conduct collective bargaining and structure labor-management relations. Who knows, it might even teach private sector management and labor leaders how to reform their relationships before the 70,000 in the streets of Madison escalate into millions across the country. 5 How Massachusetts Can Stop the Public-Sector Virus Rappaport Institute | EPRN POLICY BRIEFS

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“Did Credit Market Policies Cause the Housing “To Preserve and Protect: Land Use Regulations Bubble?” by Edward Glaeser (Harvard University), in Weston, MA,” by Alexander von Hoffman (Joint Joshua Gottlieb (Harvard University), and Joseph Center for Housing Studies) November 2010. Gyourko (Wharton School) May 2010. “Managing Cross-Departmental Collaboration: “Geography, Venture Capital, and Public A Performance Scorecard for Boston’s Mayoral Policy,” by Josh Lerner (Harvard Business School) Sub-Cabinets,” by Meghan Haggerty (MPP ‘10, March 2010. Harvard Kennedy School) and Devin Lyons-Quirk (MPP ‘10, Harvard Kennedy School) June 2010. “What Makes a City Entrepreneurial?” by Edward L. Glaeser (Harvard University) and “The Massachusetts Teacher Workforce: Status William R. Kerr (Harvard Business School) and Challenges,” by Antoniya Owens (MPP ‘10, February 2010. Harvard Kennedy School) May 2010.

“Improving Health Care Quality and Values: “Wrestling with Growth in Acton, Massachusetts: Local Challenges and Local Opportunities,” The Possibilities and Limits of Progressive by Katherine Baicker (Harvard School of Public Planning Case Study,” by Alexander von Hoffman Health) and Amitabh Chandra (Harvard Kennedy (Joint Center for Housing Studies) February 2010. School) May 2009. “Massachusetts Chapter 70B: Findings and “Silver Bullet or Trojan Horse? The Effects of Recommendations,” by Megan Britt (MPP ‘09, Inclusionary Zoning on Local Housing Markets Harvard Kennedy School) and Anna Hall (MPP ‘09, in Greater Boston,” by Jenny Schuetz, Rachel Harvard Kennedy School) May 2009. Meltzer, and Vicki Been (Furman Center for Real Estate and Urban Policy) NYU March 2009. “Green Zoning: Creating Sustainable Communities Through Incentive Zoning,” by “Reviewing Chapter 40B: What Gets Proposed, Philip Schaffner (MPP ‘09, Harvard Kennedy What Gets Approved, What Gets Appealed, and School) and Jake Waxman (MPP ‘09, Harvard What Gets Built?” by Lynn Fisher, (Massachusetts Kennedy School) May 2009. Institute of Technology) November 2008.

RAPPAPORT INSTITUTE for Greater Boston Rappaport Institute for Greater Boston Employment Policy Research Network

The Rappaport Institute for Greater Boston is The Employment Policy Research a university-wide entity that aims to improve Network is a diverse group of more than governance of Greater Boston by fostering 100 academic researchers from more than better connections between scholars, policy 30 universities around the country who makers, and civic leaders. The Institute share a deep interest in and concern about was founded and funded by The Phyllis the state of work and employment in the and Jerome Lyle Rappaport Foundation, United States and around the world. More which promotes emerging leaders. More information about the Netork is available at information about the Institute is available at www.employmentpolicy.org www.hks.harvard.edu/rappaport. 6