Janus v. AFSCME: The Policy Implications of Removing Mandatory Agency Fees

Last week was a crazy week for the Supreme Court (SCOTUS), the most notable being that of Justice Kennedy's retirement. However, there was another significant event at the Court: Janus v. American Federation of State, County, and Municipal Employees (AFSCME). The Janus case is important because it asked whether it is constitutional to require public employees to pay an "agency fee" to a union that they refuse to join.

In 2016, I wrote about compulsory union dues when SCOTUS was presented with the case of Friedrichs v. California Teachers Association. The Friedrichs case that was very similar to the Janus case, which is why many of the arguments I used two years ago will be used here today. Getting back on track, Justice Scalia had just passed away in early 2016. Because there were only eight Justices, there was an equally-divided Court that favored the lower court's ruling, and ruled that the Friedrichs case did not set precedent. This is why Janus is important: because it ruled that an agency fee for public-sector employees is a violation of the First Amendment. The Janus case is a rare example of SCOTUS setting aside stare decisis and overturning precedent being set, in this case, that of Abood v. Detroit Board of Education (1977).

I do have some more philosophical qualms with allowing agency fees, and not just with that of freedom of association and forcing people to join something as hyper-politicized as a union (e.g., only 41 percent of teachers are Democrats, although 94 percent of teacher union campaign contributions go to Democrats). The problem with the Abood case is that it drew this arbitrary line between the public-sector unions' collective bargaining and political action. For public sector unions, collective bargaining is inherently a political activity because increased wages and benefits have a direct impact on public policy. I also have an issue with the idea of compulsory agency fees. If a union does a good job representing its members, why the need for compulsory membership? Wouldn't potential members simply see the value of union membership and join?

I would like to keep the focus of this analysis on the public policy implications of the Janus ruling. Some are already calling the Janus case a death blow to the labor movement. Nat Malkus, the Deputy Director of Education Policy at the American Enterprise Institute, released a data analysis (also see here) on what happened when three states (Indiana, Michigan, and Wisconsin) removed agency fees, and what it meant for unionism. There is no doubt that the removal of agency fees will curtail the influence of unions, especially that of teachers unions. The union-backed Illinois Economic Policy Institute (ILEPI) estimates that there will be a nationwide decline in union membership of eight percent with SCOTUS ruling in favor of Janus (Manzo and Bruno, 2018).

The ILEPI study also predicted an annual decline in economic activity of $11.7B to $33.4B. I have my skepticism about such a finding, least of which I have found right-to-work laws a preferable option to compulsory unionism (read the Freedom Foundation amicus brief and research from the Heritage Foundation for more information). The truth is that unions have a monopoly power, a power to raise wages and benefits above fair market value. As a result of the law of demand, less people can be hired by the given employer. The tradeoff of higher wages for union employees is more inefficient allocation of resources (Anzia and Moe, 2013), as well as less profit and fewer jobs (Holcombe and Gwartney, 2010). The libertarian Competitive Enterprise Institute also found that collective bargaining has created a deadweight loss of 10 to 12 percentage points in the GDP over the past century (Gallaway and Robe, 2014).

Collective bargaining for teachers has also shown to have a negative effect on students. A paper from Cornell University found that collective bargaining reduced students' earnings by an average of $800 a year, which amounts to reduced earnings of $199.6 billion annually (Lovenheim and Willen, 2018). There is also evidence suggesting that state teacher union strength has a negative impact on student test scores (Lott and Kenny, 2013; Moe, 2008).

Another issue is the nature of public-sector unions is different from that of private-sector unions. In a private-sector union, there are a limited amount of funds that a business can use to improve wages and benefits for private-sector workers. Contrast that to the public sector, which is not a problem because the union is sitting on both sides of the table (i.e., the union and the politicians they have [in probability] gotten into office). A public-sector union is incentivized to advocate for increased taxes, which is why President Franklin D. Roosevelt realized how public-sector unions pit taxpayers against public-sector employees, at least in part because unions are not bargaining with the taxpayers.

The public-sector union relationship has created increasingly lavish wages and benefits, which has contributed to another problem: unfunded pension liabilities. The Pew Charitable Trusts released a report this past April on the state pension funding gap. It found that there are only four states that have at least 90 percent of the assets to fund promised benefits: New York, South Dakota, Tennessee, and Wisconsin. The fifty states cumulatively have a funding gap of $1.4 trillion as of 2016. The collective bargaining for higher-than-competitive-market wages and benefits has greatly contributed to this looming problem that will end up being the single greatest state-level budgetary issue for the vast majority of states (e.g., Novy-Marx and Rauh, 2012).

Where do we, the people, go from here? One potential workaround is to have the money come directly from the state or local Treasury. However, that might not be politically feasible because of the optics of more collusion between unions and government. If not, then there very well could be thousands who leave the public-sector unions. Less money means less capability, which very well mean teachers unions have to reach across the aisle to get things done. The major implication of Janus is that public-sector unions will have to prioritize its operations. If it wants to retain or increase membership, it will mean having to provide a value proposition instead of coercing agency fees. The paradox here is within 2018 survey findings from the Educators for Excellence. Most teachers find unions to be important, but most teachers also find that unions do not adequately represent members.

Let's also remember that exclusive representation is not inherent in unionism, but rather a result of state laws mandating it. Unions in Europe rely less on exclusive bargaining representation and more on collective social representation, which seems to work better (as well as diminish the free-rider argument of Abood). Regardless of exact approach, one thing is crystal clear: if public-sector unions want to survive post-Janus, they will need to learn how to adapt to the twenty-first century.