Friday, February 11, 2011

Project Labor Agreements

I testified before the relevant committee of the Indiana Senate a few weeks ago. It passed there. It looks like I'll do so for the relevant House committee next week.

Here's the follow-up article I wrote for papers across Indiana-- on PLA's ("project labor agreements")...

An Economist’s View of Project Labor Agreements

Project Labor Agreements (PLAs) are collective bargaining agreements that establish terms of employment for a specific project. PLAs typically require a contractor to hire workers through union halls and follow union rules on pensions, working conditions, and conflict resolution. Non-union workers are usually required to pay union dues during the project. Obviously, PLAs make it more difficult and costly for non-union contractors to bid on such projects.

At the federal level, the use of PLAs has varied with the party of the president. Democrats Clinton and Obama have supported such arrangements; both Bush presidencies opposed them. In Indiana, state legislators are considering a prohibition on PLAs for state and local government projects (SB333 sponsored by Sen. Greg Walker; HB1067 sponsored by Rep. Phil Hinkle).

Restrictive contract provisions and government regulations often result in unintended but perverse consequences. In this case, the most troubling result of PLAs is probably that union workers from other states are favored over non-union workers from Indiana.

What are some other concerns?

The most notable is that PLAs will reduce bidding competition and increase costs. Particularly as consumers, we realize that competition is helpful. If I were to arrange laws so that you could only shop at WalMart or eat out at McDonalds, you’d be upset. But for producers, limited competition is quite attractive. In the public sector, higher costs result in higher taxes or reduced spending in other areas. This is especially troubling with tight budgets in a rough economy.

Proponents of restrictions can point to certain efficiencies that come from monopoly power. For example, imagine a law that required you to deal with a single home builder. He might say that he could avoid the cost of bidding and pass those savings to you. Similarly, if we gave them monopoly power, McDonalds could reduce costs by eliminating advertising. Likewise, we could avoid campaign spending if we got rid of elections or held them once a decade.

The question is not whether monopolies have some efficiencies, but whether monopolies are a net improvement. The efficiency of monopolies is difficult to imagine. Beyond that, studies show that costs for public-sector projects with PLAs were 12-20% higher.

Second, note that the proposed legislation only speaks to PLAs in the public sector. Interestingly, we observe some PLAs in the private sector. The difference is a company would negotiate its own PLA. In the public sector, politicians vote to fund a project, but political appointees later negotiate the PLA (with different ends in mind). The bottom line is that, with the looser budget constraints and deeper pockets of government, one would expect PLA inefficiencies to be magnified in the public sector.

Third, from the field of “Public Choice” economics, we know that political intervention is attractive when there are concentrated and obvious benefits for one group—and diffuse and subtle costs for another group. The recipients are excited while those bearing the costs don’t notice. The recipients lobby for such restrictions and tell us why the legislation is good for us. Those in the general public are busy mowing their lawns and raising their kids—and won’t pay attention.

Likewise, we know that suppliers (of labor or product) have an incentive to restrict their competition with laws that prevent them from participating in the market—or indirectly, by increasing their costs and making it more difficult for them to compete.

These are especially important considerations because labor unions are famous for using public policy to reduce competition in labor markets (for example, through “prevailing wage” laws) and product markets (most notably, with respect to international trade). And by definition, unions are cartels in labor markets—groups of (labor) suppliers who collude to extend their market power. Putting it more succinctly: if PLAs are not to their advantage, why would they avidly advocate their use?

Indiana’s state politicians are left with a difficult choice. Will they benefit union construction workers (who are fewer but better-organized politically) over non-union construction workers (who are more numerous but less-organized)? And will they benefit union construction workers at the expense of taxpayers?


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