Why Stamp Prices Outpace Inflation

What can the rising cost of postage tell us about the economic conditions of our postal system?

Photo by USPS

In a world where email, texts, and social media dominate our daily communication, there's something charming about a handwritten letter sent with a postage stamp. But have you ever noticed that the price of stamps seems to be climbing faster than the overall inflation rate? Let’s look at how the history of stamp price hikes is intertwined with a fascinating economic theory known as Baumol's cost disease.

Earlier this summer, the U.S. Postal Service (USPS) increased prices on first-class mail stamps from 63 cents to 66 cents. While it might seem like a small bump, the change raises the cost of mailing a first-class letter by about 5.4%. And guess what? It's already the second time this year that the price of stamps has gone up! At the start of 2023, stamps were priced at 60 cents. USPS said the hikes have been necessary to offset increasing operating expenses associated with inflation.

But why has the price of postage outpaced the overall price level in the economy for decades? What's behind this trend? To find out, we need to dive into the heart of the USPS's challenges and the economic concept that holds the key.

It's no secret that the Postal Service is facing numerous challenges. The decline in the demand for physical mail is one of them, but that can’t really explain the price increases. The real issue lies on the supply side of the market. We must look beyond the obvious reasons and consider a theory that has been at play since the 1960s—Baumol's cost disease.

To understand the conundrum behind stamp prices, let's look at an interesting economic theory named after economist William J. Baumol. The theory explains how costs tend to rise over time in labor-intensive industries, even when there's little to no increase in productivity. The postal services may just be the perfect modern-day example.

The primary function of the postal service is achieved through the human touch—mail carriers traveling to different neighborhoods and delivering letters to our mailboxes. Although the sorting process has become more automated, the delivery portion still requires a single individual to place the letter in a mailbox. Getting that letter or package to a customer is infamously known as the “last mile” problem of logistics.

US Post Offices in the contiguous United States, 1789-2000. Darker points represent exact locations and lighter points are randomly located within their surrounding county. [Cameron Blevins]

This labor-intensive model creates obstacles to meaningful productivity growth. While other industries benefit from technology and automation, the postal industry's reliance on human effort leads to slower efficiency gains. Yet, wages continue to increase in line with other sectors, creating cost pressures for the USPS.

Classical economics predicts a wage competition effect, where workers may leave for higher-paying positions in industries with better labor productivity, leading to salary hikes for workers in the original sector. In the context of mail carriers, their wages may increase not due to substantial productivity improvements in the postal industry, but rather because of productivity and wage increases in other industries that attract skilled workers away from mail delivery.

It's like a continuous cycle. As other sectors experience productivity growth and raise wages, the USPS must raise mail carriers' pay to retain its workforce. But the challenge lies in addressing these wage increases without significant productivity improvements. Here’s how Baumol summarized it in a 1967 paper:

If productivity per man hour rises cumulatively in one sector relative to its rate of growth elsewhere in the economy, while wages rise commensurately in all areas, then relative costs in the nonprogressive sectors must inevitably rise, and these costs will rise cumulatively and without limit...Thus, the very progress of the technologically progressive sectors inevitably adds to the costs of the technologically unchanging sectors of the economy, unless somehow the labor markets in these areas can be sealed off and wages held absolutely constant, a most unlikely possibility.

The impact of Baumol's cost disease extends beyond the postal service. It resonates with other labor-intensive sectors, such as healthcare, education, and performing arts, where productivity gains remain constrained. Understanding this economic concept allows us to recognize the challenges faced by industries heavily reliant on labor with limited scope for productivity growth.

The USPS faces a predicament when considering the need to continually increase stamp prices. The evolving digital landscape and declining demand for physical mail services have challenged its historical business model. Yet, regulatory constraints and pricing limitations keep the USPS tethered to the past, intensifying the impact of Baumol's cost disease. The agency continues to grapple with the impact of a 2006 law that required USPS to fund the cost of its post-retirement healthcare costs.

Proposed solutions range from pricing reforms to cost-cutting measures and innovative strategies. But the underlying productivity issue of mail carriers remains. The Postal Service has a rich history dating back to the Second Continental Congress in 1775, and as times change, it might be time to rethink our service delivery model.

• Domestic postcards increased from 48¢ to 51¢ and international postcards from $1.45 to $1.50 [CNN]

• There were an estimated 326,760 mail carriers in the U.S. in May 2022 [Bureau of Labor Statistics]

• The median annual salary for a mail carrier in the U.S. was $54,250 in May 2022 [Bureau of Labor Statistics]

• Effective July 1, 1863, the price of postage was 3 cents for every 1/2 ounce [USPS]

• The ZIP in ZIP Code stands for Zone Improvement Plan, and it was introduced on July 1, 1963, as part of a larger plan to improve the speed of mail delivery [Library of Congress]