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RESEARCH PROPOSAL

“THE IMPACT OF PRIVATIZATION ON STATE WORKERS: SURVEY EVIDENCE FROM LIQUOR RETAILING IN WASHINGTON STATE (I-1183)”

Andrew Chamberlain

Department of Economics University of California, San Diego

May 2013

I. BACKGROUND

In November 2011, Washington State voters approved ballot initiative I-1183, privatizing the state’s liquor retailing and distribution system. Previously the industry had been state-owned and operated for more than seven decades under the supervision of the Washington State Liquor Control Board (WSLCB).1 The passage of I-1183 dramatically ended the system, closing roughly half of the state’s 328 liquor stores and liquidating the assets at auction. The state’s roughly 160 privately owned “contract” liquor stores were allowed to remain in operation, but were required to purchase all remaining inventory from the state. As a consequence, roughly 900 union-represented employees of state liquor retail and wholesale establishments were laid off in the months leading up to June 2012. The strongest political opposition to industry privatization commonly comes from workers themselves, fearing wage cuts and reduced employment. There is a large theoretical literature on the labor market effects of privatization [see for example Vickers and Yarrow (1991); Shleifer and Vishny (1994); Boycko, Shleifer, and Vishny (1996); Aghion and Blanchard (1998); Shleifer and Summers (1988); and Gokhale, Groshen, and Neumark (1995)]. Similarly, there is a large empirical literature on “plant closings” that examines the impact of specific private-sector plant closures on employment and earnings [see for example Hamermesh (1989)]. However, there are few empirical papers examining the labor market effects of privatization of state-run industries. This study will contribute to this literature by assessing the impact of Washington State’s privatization of liquor retailing on earnings and employment of affected workers. II. RESEARCH GOALS

The goal of this study is to quantify the impact of Washington State’s I-1183 on earnings and employment of affected state workers. The study will analyze wages, benefits and employment for the roughly 900 state employees terminated by the policy both before and after enactment of I-1183. Using a standard “difference-in-differences” approach, we will compare the labor market outcomes of former 1 Seventeen other U.S. states remain as “control” states, with some type of state control over liquor distribution. Eleven states have a system similar to Washington State featuring state control over both liquor retailing and wholesale distribution.

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liquor store employees with similar retail workers in Washington State, allowing us to identify the causal effect of industry privatization on earnings of affected workers. This research will have direct policy relevance, as several U.S. states have introduced similar liquor privatization legislation, and lawmakers weighing the costs and benefits of these policies are closely monitoring Washington State’s experience. There are three main research goals for this study:

1. Collect basic descriptive information about wages, employment, health insurance coverage, union representation, and other labor market outcomes for the roughly 900 state workers laid off following the passage of I-1183. This information will be obtained through an original mail and email survey of affected workers, providing valuable information about the impact of I-1183 on former state employees.

2. Identify the effect of I-1183 on earnings of state liquor store employees (the “treatment” group)

compared with earnings of a comparable group of private-sector retail employees (the “control” group) via a standard difference-in-difference estimation approach. This will help isolate the causal effect of liquor privatization on wages of affected workers—information that is essential for lawmakers in U.S. states considering similar liquor industry privatization efforts.

3. Provide an estimate of the internal wage premium or “economic rents” that may have been

enjoyed by state workers under the previous state-run system, and analyze whether these rents were shared disproportionately by certain subgroups of workers (e.g., male employees, employees with longer job tenure, white employees, etc.). This will provide important information about the efficiency and labor market effects of state-owned enterprises compared to privatized firms.

III. METHODOLOGY

The core of the study is an original mail and email survey to collect data on wages, benefits, employment and other information from the roughly 900 state employees affected by I-1183. The survey will be conducted between roughly March and July 2013, approximately one year after the policy went into effect. Individual survey responses will be matched to publicly available records on wages and employment for WSLCB employees from 1995 to 2011. This will provide detailed earnings histories for each affected worker which will allow us to assess the effect of I-1183 on earnings. Publicly Available Data The study will make use of publicly available data on wages and employment of WSLCB workers from the Washington State Office of Financial Management (OFM). The data are based on 1995-2009 editions of OFM’s Personnel Detail Report.2 The reports include,

• Employee first and last name; • Job title; • Hourly wages or monthly base salary; and • Percentage of full time employment (e.g., 50 percent, 100 percent, etc.).

2 OFM’s Personnel Detail Reports are available at http://www.ofm.wa.gov/persdetail/.

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The OFM reports are biannual, and present a snapshot of wages and employment from payroll records in January of that year. In 2010 OFM changed its reporting methodology and began reporting only gross annual pay (not wages and monthly salaries). We hope to obtain additional wage and salary data for 2010 and 2011 from OFM on a confidential basis in the coming months. For the comparison or “control” group of workers, the study will make use of publicly available earnings data either from the Panel Study of Income Dynamics (PSID) or the Current Population Survey (CPS).3 Our control group will consist of Washington State households in the private retail industry with similar observable characteristics to the participants in the survey (e.g., similar age, sex, education). Original Survey Data The study will conduct an original mail and email survey of roughly 900 former WSLCB employees affected by I-1183. Contact information for the affected workers will be provided by the United Food and Commercial Workers (UFCW) Local 21, the Washington State union that represented a majority of former WSLCB employees.4 This information will be provided to the researchers on a strictly confidential basis for research purposes only. Using this contact information, the survey will collect the following information from participants:

• Current employment status (e.g., employed or unemployed; union membership; employed at the retail same location or new location; private sector or government employment; industry of employment, etc.);

• Current wages or monthly salary;

• Percentage of full-time employment (e.g., 50 percent, 100 percent, etc.);

• Level of health insurance and other fringe benefits, compared to the previous level enjoyed as a WSLCB employee (e.g., “Would you estimate that the dollar value of your fringe benefits at your current job are worth less, more, or about the same as the fringe benefits you received at your old Washington State liquor retail job?”);

• Additional demographic characteristics (e.g., age, sex, education, marital status, etc.).

Identification Strategy We will identify the effect of liquor industry privatization on earnings via a standard difference-in-differences estimator for panel data. Consider the following estimating equation,

(1) where yit is earnings of worker i in time t. Period t = 0 corresponds to the period before privatization, and t = 1 represents the post-privatization period. Similarly D = 1 denotes membership in the treatment group (Washington State Liquor Board employees) and D = 0 denotes membership in the comparison group of non-liquor retail employees matched with members of the treatment group on observable characteristics. The coefficient of interest is δ, which corresponds to the difference-in-difference

3 Background information about the PSID and CPS surveys is available at http://psidonline.isr.umich.edu/ and http://www.census.gov/cps/. 4 Additional information about UFCW 21 is available at http://www.ufcw21.org.

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estimator for the effect of privatization on earnings for the two groups during the pre- and post-policy time periods. IV. SURVEY IMPLEMENTATION

The survey of former WSLCB workers will follow a “multi-mode” approach combining mail, email and web-based survey instruments. The process begins with an initial letter to respondents explaining the purpose of the study and guaranteeing confidentiality of responses. The letter is then followed soon after by a mailed questionnaire consisting of 20 questions over 4 pages. Respondents will have the option of manually completing the paper survey or logging into a secure web-based survey form. The researchers will enter any paper survey responses into the same web-based system, assuring all data are maintained in a consistent and secure electronic format. Households that initially fail to respond will receive a follow-up postcard encouraging them to complete the survey, and reminding them of the web address for the online questionnaire. Based on survey response rates, this process of mailed surveys followed by reminder cards can be conducted in repeated waves. As survey results are compiled, researchers have the option of comparing the statistical distribution of respondents to the known distribution of the roughly 900 WSLCB employees affected by the policy. This will allow researchers to control survey response bias, and adjust the sampling strategy accordingly to assure a representative sample of affected workers. Based on this approach, we believe the survey will allow for statistically valid inferences about the labor market effects of I-1183. Please address all questions or comments about this proposal to: Andrew Chamberlain Ph.D. Student Department of Economics University of California, San Diego Email: adchamberlain@ucsd.edu Phone: (206) 366-5466 Web: http://econ.ucsd.edu/~adchamberlain/

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REFERENCES Aghion, Philippe, Olivier Blanchard, and Robin Burgess, “The Behaviour of Firms in Eastern Europe,

Pre-Privatization.” European Economic Review, Vol. 38(6), 1327–1349, 1994. Boycko, Maxim, Andrei Shleifer, and Robert W. Vishny, Privatizing Russia. Cambridge, MA: MIT

Press, 1995. Gokhale, Jagadeesh, Erica L. Groshen, and David Neumark, “Do Hostile Takeovers Reduce

Extramarginal Wage Payments?” Review of Economics and Statistics, Vol. 77(3), 470–485, August 1995.

Hamermesh, Daniel S. (1989), “What do we Know about Worker Displacement in the United States?,”

Industrial Relations, 28 (1): 51-59. Shleifer, Andrei, and Lawrence H. Summers, “Breach of Trust in Hostile Takeovers.” In Alan Auerback,

ed., Corporate Takeovers: Causes and Consequences. Chicago: University of Chicago Press, 1988. Shleifer, Andrei, and Robert W. Vishny, “Politicians and Firms.” Quarterly Journal of Economics, Vol.

109(4), 995–1025, November 1994. Vickers, John, and George Yarrow, “Economic Perspectives on Privatization.” Journal of Economic

Perspectives, Vol. 5(2), 111–132, Spring 1991.