Full Steam Ahead 🚂
A closer look at the economic forces behind the averted rail strike.
Since last winter, the US economy has been hanging by a thread due to a labor dispute between rail workers and freight companies. A few months ago, the workers, represented by 12 different unions, had agreed to a proposal that would increase their earnings, but the last remaining point of contention was over their employers' refusal to provide a meaningful amount of paid sick leave. The workers were prepared to strike, but Congress stepped in at the last minute to prevent it. The outcome of this dispute could have had devastating effects on the economy, but the disaster has been narrowly averted (for now) thanks to a nearly 100-year-old law and Congressional intervention.
Most labor disputes never end up being debated in Congress. The Railway Labor Act, passed in 1926 as one of the first labor laws in the nation, gave Congress the power to regulate labor relations for airlines and railroads. Early politicians recognized the social costs of potential rail disputes, and this foresight ultimately saved the US economy from an estimated $2 billion a day reduction in output. The ongoing tension can best be understood at the intersection of network externalities and market power.
Network Externalities
Network externalities refer to the positive effects that occur when more people use a particular product or service. In the context of freight rail, this means that the more goods that are transported by rail, the more valuable the rail network becomes for everyone involved. As the rail network becomes more heavily used, it becomes more efficient and cost-effective, which makes it more attractive to businesses and consumers. This in turn leads to even more goods being transported by rail, further increasing its value. This creates a positive feedback loop that can lead to a stronger and more successful freight rail network.
Rail lines are a key component of the American economy, carrying 40% of the nation’s annual freight. A single day without functioning freight rail would cost the U.S. economy billions, but the longer it goes on, the more it hurts! When retailers can't get new goods, shortages quickly follow. When fertilizer doesn't reach farmers, crop yields suffer and food prices soar. The spillover effect can have disastrous consequences for the economy!
Congress stepped in to address the spillover effects from a rail disruption because the American trucking industry couldn't handle the impact alone. Despite the trucking industry's best efforts, there just aren't enough drivers to go around. According to the American Trucking Association, a trade group made up mostly of big trucking companies, there's a nationwide shortage of truck drivers. So even though trucking might offer better access to some locations, it's often much more expensive and less fuel-efficient than rail freight. That's why rail is such a crucial part of our economy – it keeps costs down and helps things run smoothly.
Market Power
The rail industry in the United States is dominated by a few large companies, such as Union Pacific and BNSF Railway, which have significant bargaining power over workers and suppliers. This concentration of power allows a handful of companies to dictate the terms of employment, including wages and benefits, to workers. While some regions of the country, such as Chicago, may offer employment opportunities from multiple competing rail companies, others may only have one or two dominant firms.
In situations like this, these firms may wield their power as monopsonies, dominating the local labor market and leaving workers with limited options for employment. As a result, employees in these areas may be forced to accept lower wages and less favorable working conditions. However, workers in monopsonistic markets may be able to use their collective bargaining power to improve their situation.
One way to increase their negotiating power is by forming a union, which can help workers to stand up to their employers and demand better pay and benefits. In fact, the intended strike was meant to show the strength of their demands and the need for change. By coming together and speaking with one voice, workers in monopsonistic markets may be able to improve their situation and negotiate for the fair treatment they deserve.
Final Thoughts
New York Magazine has a fascinating take on the ongoing rail strike, highlighting an important factor that has contributed to the stalemate. The rail companies already agreed to a 24% pay raise and a $1,000 bonus for workers, but paid sick days were the main point of contention. The rail companies argued that offering paid sick days would be incompatible with their operational strategy, known as precision-scheduled railroading (PSR). This strategy aims to transport more freight using fewer workers and railcars, running at full capacity as often as possible.
There’s a particular line in the article that reminded me a lot of how I teach the concept of derived demand:
[T]he railroads are in the business of moving freight, not creating jobs.
The demand for rail workers is derived from the demand for rail transport, not the other way around. Theoretically, firms that can cut costs while providing the same level of service could benefit the wider economy if they pass those cost-savings onto consumers. This concept of derived demand is one that I often discuss in my labor economics classes, and it's fascinating to see it playing out in this real-world situation.
Paid sick leave was available to 79% of all civilian workers in March 2021 [Bureau of Labor Statistics]
The U.S. freight rail network operates over 140,000 miles of privately owned track in every state except Hawaii [US Department of Transportation]
Non-unionized U.S. Class I freight rail employees earned an average annual compensation of $135,700, including wages and benefits [Association of American Railroads]
In 1980, there were 40 Class I railroads. Today, there are just seven. Of those seven, four have 83% to 90% of the freight railroading market [The American Prospect]