The Public Purpose
Number 7 - January 1996

US Urban Transport (Transit) Labor Law
Puts Employees Above Riders & Taxpayers:
How US Transit Labor Privileges Violate the Public Purpose are run for the benefit of those who work in them
rather than those who desperately need them

- The Sunday Times (London)

Paying more than necessary for labor: There has been opposition to competitive tendering (competitive contracting, also called public-private competition in Vice-President Gore's National Performance Review [Reinventing Government]) on the basis that private companies compensate their employees at a lower rate than public agencies. While the savings from public-private competition involve more than labor savings, on balance, private sector employee compensation tends to trail public sector employee compensation in transit. This raises two issues: how employee compensation is determined, and whether public employees should be paid more than private employees doing the same work.

1. Public and Private Compensation: For decades, governments have attempted to set public employee compensation at market rates at the same rates as employees in the private sector performing comparable tasks. This principle of comparability is achieved with respect to bus drivers, for example, where wages and benefits per public driver is the same in economic terms as that of private bus drivers. The difference between public and private bus driver compensation is not a "union premium," it is rather a "monopoly premium." In San Diego, unionized public drivers are paid the market rate for services provided through public-private competition. In Seattle, public transit drivers are compensated at approximately 150 percent above that of private drivers who operate services under public-private competition. Both groups of drivers are unionized and are represented by the same local of the same union. Compensation for unionized bus drivers must remain, by definition, within the market range, for companies with unionized drivers to survive.

2. How employee compensation is set: In the competitive market, which is the model for reinventing government, employee compensation is set by customers as reflected in the prices that they are willing to pay for the goods and services they purchase. This is also referred to as market determination of wages and benefits. Above market compensation can be sustained only where legal barriers protect employees from the competitive market. The result is that, through higher taxes, employees who are paid market rates subsidize employees who are paid above market rates. While it might seem desirable for all employees to be paid above market rates, the financing of such an endeavor would result in hyper-inflation or massive unemployment.

Riders and taxpayers pay more than necessary for transit service where public transit employee compensation, or any other cost factor, exceeds the rates that customers are willing to pay in the competitive market. The result is less effective and efficient transit lower levels of service are provided and fares are higher than they would otherwise be.

Job Security: US transit competitive tendering has been routinely implemented without laying off public employees. San Diego especially indicates the potential for implementing public-private competition while preserving job security and compensation levels for public employees (even at above market levels). On the other hand, as the public financial situation becomes more constrained, there may be a need to consider layoffs in the future. Vice-President Gore's National Performance Review provides an approach (which will be made available to federal employees) where layoffs become necessary:

we will help that employee find another job offer, either with government or in the private sector.
Special Labor Protection: At present, Section 13(c) of the Federal Transit Act, transit employees are accorded special protection, which can equal up to six years of severance pay where their positions are eliminated due to economies or efficiencies. Payment is not in a lump sum, rather it is paid over the severance period as if the employee were still working. This protection is far greater than that available to other public and private employees. Vice President Gore's National Performance Review characterizes extraordinary protection as "special interest privilege(s)" obtained by "holders of some occupations."

Researchers have found that Section 13(c) is costly, because it discourages innovation that could reduce costs. Section 13(c) may add as much as $2.5 billion annually to the cost of transit services. Congress has provided no funding to offset these costs, and Section 13(c) represents one of the most expensive unfunded federal mandates. However, transit agencies have shown that a healthy program to reinvent transit through public-private competition is possible under Section 13(c) so long as implementa tion is limited to the natural rate of employee attrition. In Denver, conversion to contracting occurred at a greater pace as public sector drivers were paid for not working until natural attrition opened new positions (and money was still saved).

Focusing on Policy: One of the most fundamental principles of reinventing government is a focus on public policy objectives. Public services (of required quality and quantity) should be produced for a price that is no higher than necessary. This means that all factors of transit service production labor, supplies, equipment, etc. should be obtained for the lowest cost, consistent with specified service and safety standards. The public can be assured that it is not "paying higher prices than necessary." if transit is reinvented if transit agencies routinely apply public-private competition, and rely on entrepre neurial services wherever service to the customers --- the riders and taxpayers --- can be improved.

Transit labor law violates the public purpose. By requiring that more than necessary be spent to provide transit service, federal transit labor law violates the very purpose for which public subsidies are granted to transit. Public transit is not subsdized to better employees. Public transit is subsidized to provide mobility to the poor, and to attract drivers from automobiles in congested corridors. Transit's continuing market share decline is stark testimony to the failure of public transit policy.

(c) 2000 --- Wendell Cox Consultancy --- Permission granted to use with attribution.
The Public Purpose
Demographic Briefs
Government Cost Review
Gov't Employment Fact Book
Highway & Motorway Fact Book
Intercity Transport Fact Book
Labor Market Reporter
School Transport Fact Book
Transport Fact Book
Urban Policy
Urban Transport Fact Book
Competitive Tendering Website
Intl Comp. & Ownership Conference
Alternatives to Light Rail in Seattle

Contact by E-Mail
Subscribe (Free)
Corrections Policy & Rights

The Public Purpose
P. O. Box 841 - Belleville, IL 62269 USA
Telephone: +1.618.632.8507 - Facsimile: +1.618.632.8538
Demographics, Development Impacts,
Market Research & Urban Policy