Public sector unions and municipal debt

Abstract

This paper analyzes the effects of strong public sector labor unions on the municipal bond issuances and yields of U.S. states. The findings indicate that states with strong labor unions issue more municipal debt following fiscal deficit shocks and have higher bond yields. A one standard deviation increase in the unionization rate is associated with an approximate 17% increase in municipal debt issuance following a deficit shock, and a 233 basis points higher bond yield for the state's municipal debt. Strong unions are associated with a significant reduction in the responsiveness of labor costs and capital investments to fiscal shocks. Overall, the evidence suggests that states with strong unions have lower financial flexibility and are more likely to issue new municipal debt following adverse fiscal shocks and have higher bond yields.