Why Didn't APWU Compensation Go Down?

Government Executive and Federal Times both reported today that the House Oversight and Government Reform Committee will be holding a hearing on April 5 on Postal Service pay.   It is clear from quotes attributed to Congressmen Darrell Issa and Dennis Ross that the Postal Service's witness is going to have a very unpleasant time. 

The Postal Service should expect a grilling from members of both parties in Congress.   Congress is the representative of the shareholder and the two largest creditors facing the prospect that their bills for over $5.5 billion will not be paid next fall and similar bills in future years may not be paid.  If the Postal Service takes actions that do not reduce the non-payment risk of those payments due next fall and ones due in future years than Congress is within its right to raise questions as to whether the current Board of Governors needs to be replaced and could even put the new Postmaster General and his management team at risk of replacement.  
The grilling that the Postal Service faces will likely ask one question repeatedly.  Why was the Postal Service willing to sign any contract that did not freeze or reduce the compensation of current APWU members if APWU members enjoy a significant wage premium?  

This will be the central question because testimony was presented by Michael Wachter in 2003 to the President's Commission that stated Postal Service employees enjoyed a 34.2% wage premium has been quoted by Representative Dennis Ross as the basis for his concern that the Postal Service was not tough enough in negotiating the APWU contract.  Dissapointment with the agreement was also expressed by Congressman Darrel Issa who stated "The union contract renewals are the best chance to find new savings. Unfortunately, this looks like a missed opportunity. The Postal Service must show Congress and the American people that it can pay its own way, because the numbers do not seem to add up."


These comments reflect real concern because it is not clear if the Postal Service will have the money to pay the wage increases to current employees in 2012 through the end of the contract.   However, it is not clear that going to arbitration would have produced a more favorable settlement for the Postal Service, even if it presented new testimony of Dr. Michael Wachter that continued to show a wage premium of a similar magnitude.  Having looked at the challenges of unionized firms facing the need to reduce compensation expenses in order to remain competitive found few firms that were able to do this outside of bankruptcy regardless of whether negotiations were conducted under the Railway Labor Act or the National Labor Relations Act.   Even firms without unions find it difficult to impose significant pay cuts on current employees, although it was not uncommon during the last recession for non-union firms to both increase the share of health care premiums paid by employees and eliminate the match to 401-K plans.   Many of these companies have restored these benefits as the recession ended. 
 
The House committee has two options in looking at the compensation question.  The easy way is to bash Postal Service management and grab headlines by focusing only on the wage premium issue.  A more constructive alternative would look at what would be required to bring compensation closer in line to market values.   To do that they need to look at the following questions:

1. Update the Wachter study and include analyses that look at alternative alternative approaches to this question.  
2. Update the Wachter study using the compensation of APWU members under various scenarios under which increasing proportions of APWU members are employed under the new compensation schedules, employee classifications and work rules.
3. Examine the impact of the contract provisions that increase flexibility that allow the Postal Service to eliminate the cost of contracted services for work that an APWU member could do for 2 to 4 hours within a longer shift.  
4. Similarly, what is the difference in cost between using an APWU member and the non-union employee that the Postal Service is planning to displace?
5. Examine the options the Postal Service has to convince existing APWU members to retire.   A large share if not the majority of APWU members are at the highest pay step for the type of work that they do.   Replacing these employees that are earning the highest availalble salary with those who are new would significantly cut costs.   
   
   In particular, the committee needs to ask two questions here.  First, what proportion of APWU members, other postal unions, and management employees are eligible to retire now?  Second, what is the increase in the retirement rate if a VERA is introduced and for retirement incentives ranging between 5,000 and a half year's salary?  The answer to these questions would help illustrate the type of incentive necessary to increase the attrition rate to a level high enough to significantly cut compensation.
6. Examine the arbitration process in order to determine the probability whether the Postal Service would have been generated a better result than what the Postal Service agreed to using either current law or changes suggested by Senator Susan Collins.  This examination should also determine whether alternative approaches allowed by the National Labor Relations Act or Railway Act could have produced a result that would have had frozen or reduced the compensation of APWU employees without the threat of barnkrutcy or liquidataion.

If the committee concludes after asking these questions that the APWU contract and similar negotiated contracts with other unions as well as contracts that arbitration would produce would still be unaffordable, then it must determine if the more drastic option only available to firms in bankruptcy should be pursued.   That would allow the Postal Service to break existing labor agreements and impose lower cost compensation schedules.  In doing so, the committee has to ask how much this option would disrupt the mail delivery system and the probability that the Postal Service will have a business that can generate the cash over the next thirty years to cover its payments on retirement liabilities.

The Importance of Regulation

Currently there is a major push by Congressman Darrell Issa to examine how government regulation affects economic activity.   There is no question that government regulation affects the cost of running a business.   However, those who believe that elimination of regulation is a good idea need look no further than the unregulated Japanese nuclear power industry, and poor regulation of oil drilling in the gulf, and the financial meltdown that caused the great recession.   In all three cases, the relaxation of regulation reflected the problem of dealing with rare but expensive risks.  

The importance of dealing with risk is recognized by many economists, most notably Richard Posner, a conservative economist and judge who recently wrote:

If the probability of loss is high, strenuous efforts will be made to avert it or mitigate its consequences. But if the probability is believed to be very low, the proper course to take will be difficult, both as a matter of sound policy and as a political matter (to which I return in the last paragraph of this comment), to determine and implement. The relevant cost is the catastrophic loss if it occurs discounted (multiplied) by the probability of its occurring. If that probability is believed to be very low, the expected cost may be reckoned to be low even if, should the loss occur, it would be catastrophic. And if the expected cost is low but the cost of prevention is high, then doing nothing to prevent the risk from materializing may be the optimal course of (in)action

The key here the "perception of risk."  The perception of risk is key as there are many factors that cause us to downplay or overplay the risk of an event.   For example, if preventing aheart attack requires a major change of diet that one does not want to make, no amount of prodding from a doctor or previous heart attacks, may cause the person to change.  Richard Posner goes on to explain the issue of risk perception for politicians

It would not be surprising, however, if as seems to be the case Japan failed to take cost-justified measures to minimize the damage from a 9.0 or greater earthquake. Politicians have limited time horizons. If the annual probability of some catastrophe is 1 percent, and a politician’s horizon is 5 years, he will be reluctant to support significant expenditures to reduce the likelihood or magnitude of the catastrophe, because to do so would involve supporting either higher taxes or a reallocation of government expenditures from services that provide immediate benefits to constituents. In principle, it is true, politicians would take a long view if their constituents did out of concern for their children and grandchildren. But considering how the elderly cling to their social benefits, paid for by the young including their own young, I doubt the strength of that factor, although I do not know enough about Japanese politics to venture a guess on whether politicians’ truncated policy horizons was indeed a factor in Japan’s surprising lack of preparations for responding promptly and effectively to the kind of disaster that has occurred.



The industries in the United States that face the greatest level of regulations, those in mining, construction, chemical, oil and gas, transportation of hazardous materials, and nuclear power, as well as the provision of health care, medical supplies, drugs and equipment. All are examples of industries that face the risk of rare but spectacular catastrophes.  

As the House Government Reform and Oversight Committee looks at government regulation, they need to look at the Japanese example of an unregulated market in an industry that has rare but catastrophic risks.  As Judge Richard Posner notes the U.S. and not Japan has an independent Nuclear Regulatory Industry.   Before condemming all regulations, it is worth looking at what happens when effective regulation does not exist. 

.  It is not enough to look at the cost to the firms involved of regulation but it is imporatant to determine if the regulations would argue impose costs that are less than the expenses associated with losses the regulations are designed to prevent.

Who Will Lead Postal Reform in the House?

Congressman Darrell Issa (R-CA), the incoming Chairman of the House Oversight and Government Reform Committee has recently announced the creation of three subcommittees in the next Congress and their chairman.  They are as follows:

• National Security, Homeland Defense and Foreign Operations, Chairman Jason Chaffetz (R-UT) - This subcommittee appears to have a similar jurisdiction to the National Security and Foreign Affairs Subcommittee.  This appointment moves Congressman Chaffetz, who was ranking member of the subcommittee handling the Postal Service, from primary responsibility for developing postal legislation

• Regulatory Affairs, Stimulus Oversight and Government Spending, Chairman Jim Jordan (R-OH) - This subcommittee appears to have a very broad mandate covering government regulations across both executive departments and independent regulatory agencies.  It is possible that this subcommittee could have some interest in the impact that the Postal Regulatory Commission has on the American economy.

• TARP, Financial Services and Bailouts of Public and Private Programs, Chairman Patrick McHenry (R-NC) This subcommittee will likely to focus on oversight of agencies dealing with the financial services industry and other industries in which the Federal Government has or will propose to make investment and ensure that both government and private enterprises are held accountable for how they spend taxpayer dollars. To the extent that adjustments to the Postal Service retiree benefit calculations are perceived as a "bailout" this subcommittee could take charge of this issue and for that matter any legislation designed to change the business model of the Postal Service.

It is always possible that the Postal Service will continue to fall under a catch-all subcommittee as it did this year that includes the District of Columbia and the Federal Workforce.  However, with the shift of Congressman Chaffetz to national security oversight, the other two Republicans that remain in Congress are unlikely to chair a subcommittee dealing with Postal legislation.  Congressman Bill Shuster  is in line to chair the House Transportation Subcommittee on Railroads, Pipelines, and Hazardous Materials where he will likely have to deal with railroad regulatory issues) and Congressman Brian Bilbray will not even be on the Committee in the next Congress.

The Washington Post notes that that the other five returning Congressman who will be assigned to the full committee already have Committee or subcommittee chairmanships lined up.  The Post indicated that responsibility could fall upon one of the freshman who will serve on the committee who has not been given a subcommittee chairmanship elsewhere.   They are: Justin Amash(Mich.), Ann Marie Buerkle (N.Y.), Scott DesJarlais (Tenn.), Blake Farenholt (Texas), Paul Gosar (Ariz.), Trey Gowdy (S.C.), Frank Guinta (N.H.), Mike Kelly (Pa.), Raul Labrador (Idaho), James Lankford (Okla.), Dennis Ross(Fla.), Tim Walberg (Mich.), and Joe Walsh (Ill.). 

Whether Congressman Issa chooses to put the Postal Service under one of the subcommittees he has already created or in a new subcommittee chaired by a freshman member of Congress is not known at this time.  His choice could have a big impact on how the House of Representatives frames legislative changes in the next Congress.