Destruction In Progress

Unions in the US have too much power and no responsibility. As a result, most unionized industries have departed and the public sector, where monopoly and the threat of violence or imprisonment protect revenues, is the last redoubt of the traditional unions. But they are now cannibalizing themselves as revenues can no longer increase, and retired and senior members are feasting off the juniors.

Bloomberg has an example in San Jose.

Unfortunately, Obama didn’t mention a major barrier to job growth in the public sector — and neither did Ezra: unsustainable compensation structures. This problem existed before the recession, but it’s gotten worse during the recession, because public pension systems are designed to have very rapid rises in current-year cost in the years following a recession.

Take a look at the attached chart from San Jose, California. As you can see, San Jose had an average of 7.5 employees per 1,000 residents from 1986 to 2005, and never dropped below 7.0. But in the last two years, that ratio has cratered — to 5.6 per thousand this year, with further cuts expected next year.

This is partly because revenue has risen only modestly, with general fund receipts rising 19 percent in a decade. But the main reason is that costs for a full-time equivalent employee are astronomical and skyrocketing. San Jose spends $142,000 per FTE on wages and benefits, up 85 percent from 10 years ago. As a result, the city shed 28 percent of its workforce over that period, even as its population was rising.

Of course, this is not the end of the story. As the US rolls back into recession, Calpers’ investments are going to get hammered. After big losses in the 2008/9 meltdown, Calpers opted to increase risk rather than reduce planned returns. This implies very large increases are in the future for San Jose’s required contributions.

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