John Skorburg is a lecturer in economics at the University of Illinois-Chicago who has this insightful analysis of what Wisconsin’s governor is trying to do by reining in the power of government workers to collectively bargain and making them pay more for pensions and health insurance. He emailed this to me this afternoon:
From an economic standpoint, the state of Wisconsin is trying to do the most cost-efficient option for its taxpayers. When labor becomes too inefficient due to high(er) wages, its marginal product of labor ratio (productivity per wage earner) goes down. And during a time like today when capital is cheap — with low(er) interest rates — the best and most efficient entities will trade labor for capital to become more cost efficient.
This is called the marginal rate of technical substitution — to substitute into that input which is the most cost effective to produce a given amount of output. That’s exactly what the Governor of Wisconsin is trying to do!