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Does the Auto Bailout Have Lessons for the Midwest's Public Sector Unions?

It is not surprising that the focus of the fighting around public employee benefits and collective bargaining is in the industrial Midwest. As noted in the Brookings report The Vital Center: “Today’s employee benefit, job, and income security systems, like so many of the nation’s economic and social practices, were forged in the Midwest."

These states have the most to gain economically by modernizing the social compact between the worker, the state, and employer (particularly where the latter two are one and the same). How they do so, whether by tough, but fair, negotiations that keep collective bargaining intact, or by political brinksmanship, will determine whether these states emerge better equipped to solve problems and compete economically in the 21st century.

Historically, big industrial unions (autoworkers, steelworkers) grew to scale in the Midwest. They brought needed safety, decent wages, time off, and basic rights to the workplace, spread the factory economy’s wealth more equitably, and designed the private sector prototype for pensions and health care copied by the region’s public sector employees.

In 1947 the Michigan Legislature passed the landmark Public Employment Relations Act (PERA), which allowed public-sector employees to organize for the first time and enter into collective bargaining agreements.

Wisconsin, the birthplace of the American Federation of State County and Municipal Employees union, enacted public sector collective bargaining in 1959, and was the first state to establish workers compensation and unemployment insurance--mainstays of the emerging post-war social compact.

There is another reason why Midwest states have the most at stake in the fight over public employee benefits.

Midwestern states simply have more governments.

The Northwest Ordinance (1787) organized Midwestern states-to-be around the Jeffersonian principle of government close to the people and endowed them with thousands of general purpose governmental units: townships, cities, and counties--all with school systems. Most now operate generous benefit systems.

Not surprisingly these states have some of the biggest public sector debt obligations for pensions and health care. Illinois has huge unfunded pensions, and ranks first of all states in the nation in number of general governments (2,824). Wisconsin is sixth. All of the top 10 states in numbers of local governments are in the Great Lakes and Midwest.

What’s happening now is the public sector “market” for how to define the basic employee-employer compact is catching up with the private sector, where the benefit regimes have radically changed over the past 40 years.

Driven by global competition, beginning in the 1970s the generous private sector benefit deal pioneered in the Midwest’s factories has virtually disappeared. Most private employers have moved to 401k defined contribution systems (from defined benefit systems), increased health care co-pays, or--like GM, Chrysler, and Delphi--gone through strategic bankruptcy proceedings to wipe the books clean and re-calibrate their deal with labor. Today less than 20 percent of private sector workers participate in defined benefit plans, while more than 80 percent of public sector employees still do.

What is unclear is whether the overdue push and fiscal imperative to modernize the social compact for public employees in the Midwest will be used by political leaders like Wisconsin’s governor to cripple public employee unions and, by extension, Democrats’ political powerbase.

There is some indication that this approach is both re-invigorating unions (and Democrats) and engendering a public backlash that could kill both the needed project of updating the government-worker social compact and the unneeded project of undermining collective bargaining rights.

An alternative model has been pursued in revamping private sector benefits, as in the recently re-booted auto industry, where concessions were painfully but rightly negotiated with labor partners and a new, more competitive labor-management pact forged. 

Democratic governors and some Republicans, like Rick Snyder of Michigan, are trying this route. “Michigan is not Wisconsin,” Gov. Snyder recently told union leaders, anxious to avoid a fight. Snyder is still trying to get concessions on public employee benefits through continued collective bargaining by teachers and municipal employees.

Midwest states need pension and health care reform to balance budgets and put money into job-growing investments like education and infrastructure. Globalization, the Great Recession, and the fiscal crisis in states are combining to drain public benefit systems. But Michigan and others also need to get it done in a way that helps labor and management, Republicans and Democrats, work better together, if we are to solve other 21st century economic problems--rather than claw each other to death.