A Costly Constant: The Persistence of Postal Labor Costs

A report released early last month by the Postal Service’s Office of Inspector General (A Closer Look at Postal Labor Costs) illustrated the persistence of labor as representing the lion’s share of the agency’s total costs. In turn, it offered ratepayers a glimpse of both the magnitude of the expense and how the elements of the sum have changed over the previous decade.

In FY 2018, “labor” cost $56.9 billion, or 76% of overall postal expenses, but that general heading includes many constituent costs, some of which are (or should be) within the control of USPS management and others that are not. Compensation and benefits ($50 billion) was 88% of labor costs, with the remainder consisting of mandated retirement fund and future health care contributions and the valuation of the workers’ compensation liability.

Theoretically, the Postal Service negotiates compensation and benefits with its labor unions, but decades of generous agreements (and arbitration awards) have left the USPS with a complex employee pay structure and iron-clad contract provisions for no-layoff and regular cost-of-living raises – in addition to periodic general pay increases.

The mandated payments for current and future health care and for the two employee retirement funds are beyond management control, as is the workers’ comp liability – which swings wildly as interest rates fluctuate.

The employee groups who are the source of postal labor costs shifted over the 2009-2018 decade studied by the OIG:  Over the period, labor costs fell 14%, but volume declined 17%; the number of non-career employees increased 54%, while the number of career employees declined by 20%; overtime costs increased substantially in all major labor categories; clerk and mail handler overtime increased by almost 100%.  All of this raises questions as to whether non-career employees are being used in the most efficient manner possible.

Though the trend toward a higher proportion of non-career workers may be a moderating factor in overall labor costs, the OIG noted that

“… these cost savings need to be balanced against any potential additional costs associated with these new positions – training, turnover, lower productivity, etc.  Moreover, it seems logical that the Postal Service could save money through these new positions by utilizing their more flexible schedules to reduce overtime.  Yet … overtime costs have grown over the last 10 years.”

Though volume and revenue-per-piece declined over the decade the OIG studied, the number of delivery points increased, but more on rural than city routes: delivery points served by city carriers increased by 4%, but those served by rural routes grew by 14%.  This, in turn, resulted in a 5% decline in the number of city routes – but a 4.5% increase in rural routes.

For both groups, however, the OIG questioned why the availability of lower-paid non-career workers did not translate into a decrease, or at least a smaller increase in over-time hours being used.

What the OIG found for clerk and mail handler hours was even less what could have been expected.  As stated in the report, a reduction in clerk and mail handler costs was expected following the reduction in the First-Class Mail service standards and the corresponding network realignment.  The Postal Service expected significant savings in mail processing starting in FY 2015. However, clerk costs increased slightly between FYs 2015 and 2016.  This raises questions as to why the bulk of the decline happened prior to the change in the First-Class Mail service standards and whether those changes in fact actually saved much money.

The OIG also reported on regional differences in cost:

•      “… variation in the use of overtime may reflect more than how labor costs are managed.  For example, in areas where it may be difficult to hire or there is a high turnover of employees, it may be necessary to use overtime to keep postal facilities fully staffed.

•      “A higher fraction of career employees may mean that postal managers have not been able to fully utilize the lower-cost non-career employees. ... In some cases, the lower non-career hourly wage may be too low to be competitive, and the Postal Service may have trouble hiring and retaining employees for these positions.

•      “Given that the Postal Service’s wages do not vary across the country, wages for non-career employees will be relatively more attractive in low cost-of-living areas.  Therefore, it is likely easier for the Postal Service to fill non-career vacancies in areas of the country with a lower cost of living.”

The notion of locality-based pay, common in other federal agencies, has been suggested for the USPS as well, but never adopted. However, the OIG’s findings underscore the fact that what may be an attractive wage for part-time work in mid-America is below the market in the more competitive, higher-cost areas, such as the urban areas on the coasts with a generally higher cost of living.

Readers who have reached this far still may wonder why all of this matters...  
The reasons are simple:

•      Commercial mail producers rely on the continued use of hard-copy mail for their livelihood.

•      In turn, the use of mail by ratepayers (their clients) is based in part on the cost of mail (production plus postage), with the latter, as the report clearly shows, largely tied to the cost of postal labor.

•      Lower postal labor costs moderate postage increases which, in turn, mitigate ratepayers’ motivation to use mail less or not at all.

And a mailing community aware of these factors is more effective in reminding postal management that continued efforts for greater efficiency and lower cost are essential.


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