Good afternoon. My name is James Medoff. I am the Meyer Kestnbaum Professor of Labor and Industry at Harvard University where I teach in the Economics Department of the Faculty of Arts and Sciences. Currently I teach two courses to senior-level students concentrating in economics. One is called "The Indebted Society" and deals with how debt has plagued the lives of most Americans and the other is called "The U.S. Labor Market" and deals with many of the topics you are discussing today. It is a pleasure and an honor to be with you this morning. I want to thank Chairman Collins and Senator Lieberman for inviting me to participate in this important hearing.
As you will note from my bio, labor economics, labor unions and labor markets have been central areas of interest in my academic career. I have written extensively on these topics. Two of my books may be of special significance for the subjects under discussion today. The first, a book entitled What Do Unions Do? that I wrote with my Harvard colleague Richard Freeman, examines the role played by unions in our economy. The second, a book entitled Employers Large and Small that I wrote with Charles Brown of the University of Michigan and Jay Hamilton of Duke University, explores the differences between large and small employers and how these differences affect labor market outcomes. These books are relevant not only because the Postal Service is among the largest employers in the world but also because its workforce is among the most highly unionized. I will draw on the research discussed in these books as I address the topic of this hearing.
I will also draw on my direct experience with postal collective bargaining. I have served as a paid consultant to the National Association of Letter Carriers since 1999. Although I cannot match the nearly 25 years of involvement of my fellow panelist Dr. Wachter, I have been employed on the labor side of collective bargaining in much the same capacity that he has been employed on the management side.
Of course, the reason you have asked me to appear today is not to discuss my books or to share stories of my consulting practice although I am certainly open to all your questions. You asked me to comment on the workforce recommendations of the President's Commission on the United States Postal Service and to discuss the issue of postal pay comparability. I am happy to do both.
Let me begin with the recommendations of the Presidential Commission. I do not pretend to be an expert on all the subjects addressed, but I can comment on the Commission's recommendations in two areas, those pertaining to improvements to the collective bargaining process and those pertaining to the issue of pay comparability.
First, I was pleased that the Commission affirmed the value of collective bargaining and called for its retention. My research in What Do Unions Do shows unions give workers a voice in the workplace that not only helps them improve their economic well-being, but also has salutary effects for employers. The "Voice" function performed by unions gives workers a way of communicating with their employers about how companies are run. This helps them solve workplace problems and can improve operational performance. Indeed there is considerable evidence that unions can raise the overall level of productivity in firms. This allows the unionized firms to pay better wages and leads to greater job satisfaction for workers.
The "Voice" option provided by unions is often contrasted with the "Exit" option that is theoretically available to all workers. Workers can simply leave firms if they are unhappy. Exit is often the only choice for workers in non-union settings. Voice empowers workers but it is also often a boon to employers. Unionized firms experience less employee turnover than non-union firms and therefore incur lower costs for recruitment and retention. Lower turnover can be a significant benefit for both employees and employers.
So I think the Commission was right to endorse collective bargaining. That being said, I urge this Committee to be very cautious about accepting the Commission's other recommendations in this area. My direct experience with the existing dispute resolution process and the successful track record of this process in resolving impasses in collective bargaining over the course of three decades raise serious doubts about the wisdom of the Commission's recommendations.
As a participant in the 1999 interest arbitration hearings chaired by arbitrator George Fleischli involving the Postal Service and the National Association of Letter Carriers, I can say that I was extremely impressed with the quality of the process and the professionalism with which it was conducted. Over the course of several days of hearings, the parties did an outstanding job representing their respective interests -- the union was a strong advocate for the nation's letter carriers and postal management aggressively championed the interests of the postage paying public. Both sides called a wide variety of experts, including Dr. Wachter and myself, who provided in depth evidence and testimony on the key issues and both sides were capably represented by legal counsel for purposes of cross examination and rebuttal.
Two of the Commission's recommendations to "improve the process" seem particularly misguided. First, I think it would be a mistake to jettison the tripartite nature of the interest arbitration process by using three neutral arbitrators instead of allowing both sides to nominate an advocate arbitrator to take part in the process. No matter how accomplished they are, and no matter how many days of hearings they hold, neutral arbitrators cannot possibly understand the nuances of every issue of importance or fully appreciate the unique bargaining history of the specific parties involved in an interest arbitration proceeding. Advocate arbitrators can help clarify issues and can be an invaluable resource to neutral arbitrators grappling with complex issues. Second, mandating the exact procedures to be used in deciding interest arbitration cases by, for example, fixing a strict timetable in the law or requiring the use of Last Best Final Offer ("LBFO") arbitration, is unwise. The availability of the best arbitrators and, if I may be so immodest, the best expert witnesses, would be endangered by a hard-wired timetable. And LBFO arbitration may be appropriate in certain circumstances, but not in all circumstances. It works best when both sides voluntarily agree to it as was the case when I participated in the Fleischli proceedings. But mandated LBFO arbitration would rob the process of flexibility, undermine the utility of advocate arbitrators (who often help shape the final details of decisions reached by neutral arbitrators) and more often than not lead one side or the other to see the results of interest arbitration as illegitimate. This would be very damaging to postal labor relations.
My advice on so-called "improvements to the process" is to be very careful and respect the desires of the parties involved. Any changes made should have the full backing of both postal management and postal labor.
Now let me turn to the issue of postal pay comparability. I have a strong sense of déjà vu sitting here with Dr. Wachter. In the hot summer of 1999 we were among a wide variety of experts called to address this issue. I note this because there is no right or wrong way of defining comparability and the Fleischli panel was exposed to wide variety of experts from a wide variety of disciplines with a wide range of opinions. There were economists like us, there were human resource and compensation experts and there were representatives of management and labor from other delivery companies like United Parcel Service. Indeed, both sides called managerial witnesses with UPS ties to testify on their behalf. So as you listen to us today, please do not make the silly mistake that you have heard the final word on comparability or that there is an absolute agreed way of defining it.
This leads me to my first impolite suggestion to this Committee: Stay out of this issue. Pay comparability is part of every labor negotiation in the country, whether it is in the private sector or the public sector. The very nature of collective bargaining in a market economy is to haggle over which jobs are comparable and wage decisions are best left to the negotiating partners. At various times in the past, the postal unions and postal management have achieved varying levels of agreement on pay comparability and when they haven't they have effectively used interest arbitration to sort it out.
I'll try to be more polite as I cover two other aspects of comparability the merits of the debate on postal pay comparability and the Commission's proposal to subject this debate to the tender mercies of an outside regulator.
Is there a postal pay premium? I believe the answer is no. The postal unions, whose members almost all work full-time, quite reasonably look to the wages of full-time workers doing similar work for private firms that are most comparable to the Postal Service. Postal pay appears to fall comfortably in the range of pay available to comparable workers employed by other national delivery firms. NALC, for example, points to the pay of uniformed delivery personnel who work for United Parcel Service and Federal Express. This is an entirely reasonable and appropriate definition of comparability.
Of course, as he did before the Fleischli board and the President's Commission on the USPS, Dr. Wachter will tell you he believes that a significant postal pay premium exists. I strongly disagree with his conclusion for a variety of reasons, some of which I outlined in a statement to the presidential commission. In the limited time available, I cannot go through all the details. With the Chairman's permission, I would like to submit that statement for the record and make a few points about the issue.
First, I do not agree that multivariate regression using data from a sample of workers is considered the best approach to measuring wage differentials. Few if any major companies use such an approach to set their pay levels and I don't know of a single collective bargaining agreement that has relied on the results of an econometric model to determine wage rates.
Second, I disagree with Dr. Wachter's model of comparability since it ignores or inadequately accounts for factors such as working conditions, industry structure and firm characteristics such as size that clearly influence wage levels. The model treats all industries as essentially comparable to the Postal Service, regardless if they are low-wage or high-wage industries or whether they operate nationally or locally. In other words, it treats the Postal Service as if it were just an "average" business. But, of course, with nearly 750,000 workers and annual revenues approaching $70 billion, it is nothing of the sort. And of course, the Wachter model cannot possibly capture the full range of job characteristics and working conditions that naturally influence pay levels in our economy. Compensation experts and labor relations professionals routinely take these factors into account.
Given the nature of Dr. Wachter's model, his conclusion that postal wages are 20 percent greater than those payable to otherwise similar workers in the private sector is entirely predictable. As I report in my book Employers Large and Small and as I discussed in my article "The Employer Size Wage Effect" in the Journal of Political Economy of October 1989, firm size is a critical determinant of labor market outcomes. Over time and regardless of industry or country, I have found that larger firms pay significantly higher wages to seemingly comparable workers than do smaller firms. In light of this, it is not at all surprising that a very large firm like the Postal Service and others like UPS and FedEx for that matter pay much better wages.
These higher wages are a good thing, both for workers and society on the one hand and for large firms like the Postal Service on the other. The reality is that better wages attract better workers -- better in ways that are not easy to quantify or measure -- and help large firms to attain and sustain superior levels of performance. It allows large firms to build stable, committed workforces with firm-specific skills that benefit the companies involved. Small firms may not be able to pursue this high-wage, high performance strategy, but most large firms clearly do so.
Using the standard of comparability suggested by Dr. Wachter would require the Postal Service to adopt pay practices that few large private sector companies employ. It would necessarily leave the delivery of the nation's mail in the hands of a workforce characterized by lower wages, lower skills and higher turnover. I guess the question is: Who do you want to trust to carry out the important mission of the U.S. Postal Service, the high quality workforce we have today or a very different kind of workforce in the future?
Third, I have looked at the time series data on average postal employee wages over the course of the past three decades. What it demonstrates is that, adjusted for inflation, postal employees make almost the same in 2004 as they did in 1970 after Congress significantly boosted postal pay as part of the law that reorganized the Post Office Department into the Postal Service. In other words, after three decades of collective bargaining, postal employees have only been able to protect the real wage levels Congress enacted at that time. The implication of Dr Wachter's conclusion is that Congress established a comparability standard in 1970 and then purposely violated it. That makes no sense at all.
I presented the views I have shared with you today on the issue of pay comparability with the Fleischli board in 1999. I don't know how convincing my testimony was, but I do note with pride that the NALC prevailed in that arbitration.
The last point I'd like to address concerns where the Commission's recommendations and the issue of postal pay comparability overlap. The Commission has proposed to subject the results of postal collective bargaining to regulation by a new Postal Regulatory Board, which would also regulate the Postal Services rates and services. The PRB would be asked to rule on compliance with the pay comparability standard and order remedial action if it found a violation.
I have to say, I found this proposal to be mind-boggling. Such a proposal has no precedent in any other regulated industry that I know of and would effectively destroy the collective bargaining rights of postal workers. Subjecting labor agreements negotiated in good faith by the parties to review by the same body that regulates postage rates creates a built-in conflict of interest. A regulatory body charged with protecting the interests of postage rate payers would never be accepted as an impartial judge of postal pay comparability. Giving it the power to reduce pay levels or to mandate two-tier pay systems is a prescription for a postal labor relations disaster. It would politicize the process of collective bargaining and would almost certainly do serious damage to the interests of America's postal employees. I urge you to reject this recommendation out of hand.
I want to finish on a positive note. As I mentioned at the outset, each spring I teach a class for seniors at Harvard called "The U.S. Labor Market." Over the past few years, in the wake of my involvement with the NALC, I have added a unit on postal collective bargaining to the class to teach my students about the role of unions in the labor market. I believe it provides an excellent case study of the potential benefits of collective bargaining for all concerned. Postal workers enjoy middle-class pay, decent benefits and excellent job security while the American public gets an essential public service at affordable prices. That is an achievement that Congress can be justifiably proud of and one it should preserve.