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131 IRET Congressional Advisory 1 (2002)

handle is hein.taxfoundation/iretcgadv0128 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. July 24, 2002 Advisory No. 131 THE POSTAL WAGE PREMIUM: NO WONDER THE POSTAL SERVICE LOSES MONEY Executive Summary At the end of June, businesses and consumers had to swallow an 8.8% increase in the price of a first-class stamp, from 340 to 370, as well as increases in other postage rates. The government-owned Postal Service, which has grappled with red ink throughout most of its history, clearly has serious financial problems. A key element of successful reform of the Postal Service is addressing its bloated cost structure. Some 76% of Postal Service costs consisted of wages and fringe benefits in 2001. A number of economic studies have concluded that the Postal Service pays its workers a substantial premium above wages paid to comparable workers in the private sector of the U.S. economy. A cautious estimate based on the many economic studies reviewed here is that the postal wage premium is at least 20%, and more likely is 30% or more. When fringe benefits are added to cash wages, the postal pay premium may be in excess of 40%. Economic studies have used three main approaches in estimating the postal wage premium: (1) numbers of job applicants and quit rates; (2) wage changes when moving between jobs; and (3) human capital models. The different approaches have all yielded the same basic conclusion: postal employees receive substantially higher compensation than comparable private sector workers. The evidence has convinced a number of neutral labor arbitrators that a large postal wage premium exists. Suppose the postal pay premium is 30%. The Postal Service could have saved $8.1 billion in 2001 alone merely by reducing the premium from 30% to 10%. That saving would, by itself, have allowed the Postal Service in 2001 to break even and cut the price of a first-class stamp from 34¢ to 31¢. If the Postal Service required a 3¢ rate hike in 2002 to cover higher costs, the price would then have gone to 340. The actual rate increase to 37¢ would have been unnecessary. Well-crafted postal reforms are desirable, but poorly thought out reforms could make the problems worse. The Postal Service's strategy of growing itself out of a hole by expanding into more private ventures is fundamentally flawed, because it enters each venture handicapped by having to pay compensation that is 20% to 40% above market rates.

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