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.

Is Arbitration Better for the Postal Service?

Many of the readers of the blog have raised the questions as to whether the Postal Service would have been better served going to arbitration. In a comment to another post a reader provided a history of  previous contracts that were sent to arbitration,   The picture is not pretty.

• 1978 -1981 James Healy rules in favor of unions on COLAs (no cap) and partially in favor of management on no lay-off clause, which is changed prospectively to cover only employees with a minimum of six years of service. Total increases of 31%
• 1984-1987 Clark Kerr rules in favor of unions with penalty overtime over 10hrs, continuation of COLA. Total increases of 13%
• 1990 – 1994 Richard Mittenthal rules in favor of Transitional Employees and Arbitrator Valtin decided the issue of health benefits which resulted in a 4% increase in employees’ share of healthcare cost. Total increases of 12%
• 1994 – 1998 Jack Clarke imposed a four-year agreement with COLA Roll-in. Total increases of 6.25%
• 2000 – 2003 Stephen Goldberg rules in favor of a 3 yr agreement. Total increases of 6.49%

These results are taken from a fact sheet, "A History of Postal Worker Salaries,"  that the APWU developed review the results of all contract settlements including those that were settled through negotiations and those that were settled in arbitration. 
 
The only paper on this topic "Labor Market Outcomes of Postal Reorganization" by D. Richard Froelke, the former manager of collective bargaining for the U.S. Postal Service was published in the book Mail @ the Millennium, edited by Edward Hudgins and published by the Cato Institute.  This paper provides more detail on labor negotiations through the year 2000.   Most importantly, this paper indicates that the problems in wage and benefit levels reflect the continuation of contract provisions and an understanding of pay compatibility that existed in the 1970's that has been nearly imposible to remove in either a negotiated or arbitrated settlement.   The list of arbitrated settlements above, which are described in more detail in the Mr. Froelke's article illustrates that eliminating wage premiums and restrictive work rules in arbitration did not occur even after the Postal Service began presenting significant evidence to an arbitrator regarding the need to control compensation costs.
 
Finally, it is worth noting that many who argued prior to passage of the Postal Accountability and Enhancement Act that steps were needed to constrain wages made recommendations that are not much different than contract provisions in the APWU contract.   For example, Michael Schuyler, Senior Economist at the Institute for Research in the Economics of Taxation made the following recommendations in the paper, "How to Bring Postal Compensation into Line With The Private Sector," a paper published in 2003.

• Increase postal compensation at the rate of inflation until the postal pay premium is reduced or eliminated.
• Increase postal pay more slowly than increases in an index of private sector labor costs to gradually reduce the postal pay premium. 
• Restrain postal wages when the postal worker quit rate is very low or the number of qualified people seeking postal jobs is very high.
• Vary postal wages by geographic region.
• Increase the use of part-time and temporary employees who would receive market or above-market compensation but less of a pay premium than full-time career employees.

With the exception of varying pay by geographic region, the APWU contract goes further than the suggestions made by Mr. Schuyler as it imposes, for non-career and new full time employees, a pay schedule and a definition of a full-time job that most likely closely matches market compensation and work rules for the work that APWU members perform.  The cost of getting the market based compensation and workrules for new employees  is a limit on wage increases for current employees to increases that follow his suggestions.   If the Postal Service can increase the pace of retirement of current APWU members, then I am willing to bet he and others that have written about a pay premium would agree that the trade-off represents a reasonable deal for both sides.

Comparable Wages

One of the challenges in trying to figure out whether the Postal Service has signed a financially responsible contract is that there are few good figures available regarding what are market wages for the work that APWU members do.    The Teamsters Union have recently posted in UPS Teamster Update a comparison of UPS and FedEx Express employee wages.   I have pulled out the two categories that are comparable to work that APWU members do.   The figures below only include health and welfare and pension benefits and do not inclde compensation costs for employment and unemployment taxes and workers compensation insurance.

The hourly rates are comparable to information that I have seen elsewhere.   They indicate the wages that efficient operators can offer.   The new contract should move average APWU wages within the range listed here once a significant portion of current APWU members retire.

The benefit costs here include both health care and pension benefits.  UPS has a very generous benefit package for most employees which includes a defined benefit pension and 0% employee contribution for health care benefits for full time employees.   Most part time UPS employees  likely have less generous benefits than the "average" benefit.   Turnover of part-time workers is high so many do not accrue pension benefits and their health care benefits are not as generous as those for full time employees.   UPS offers part-time employees a number of non-traditional benefits as well, most notably tuition assistance in the form of loans and grants.

The average hourly benefits listed in the chart for full time FedEx employees most likely underestimates the benefits full time employees receive.   At $3.33 per hour the benefit listed for full time worker would be the equivalent of a company contribution of $577.22 for health benefits every month.   This would appear to be the figure that FedEx pays as its contribution for single employees.  In addition to health care benefits FedEx offers its employees a defined contribution pension as well as a 401-K plan with a match.   The $3.33 figure appears too low to include the hourly cost of  retirement benefits. 

The wages and benefits listed above are paid by companies that profitably provide parcel delivery services. These companies are both known for the efficiency of their operations and their ability to deploy capital to most efficiently use the labor sorting parcels and transporting parcels between facilities.  These two carriers are also now facing rising demand for their services to the point that they are able to raise prices to both customers that pay list prices and those that negotiate rates at discounts to list rices.  

The Postal Service faces a different operating and competitive landscape.   It has significant production and transportation overcapacity and public notice processes that discourages the elimination of this overcapacity, declining volumes and revenue, limited capital to improve the efficiency of its network, regulatory constraints that prevent rational pricing and competitive constraints that prevent it from extending its product line to generate more revenue per item delivered.  These constraints make it difficult for the Postal Service to pay market rates of compensation that one must assume are within the ranges shown above.   The sooner these constraints are removed, the sooner APWU members can be assured that their compensation will fall within the ranges listed above, otherwise they can expect that compensation levels in future contracts will have their members fall behind wages paid in the private sector.