Living Economics

Broken Promises?
New York transit workers staged a 5-day disruptive pre-Christmas labor strike to hang onto unsustainable benefits.

The New York Transit Union workers went on a 5-day strike during the peak holiday shopping days before Christmas because the Union president claimed that he had to protect the interest of the unborn transit workers. His statement might have been a hyperbole, but it highlighted the increasingly untenable position of organized labor in a global economy where American labor must compete in a global labor market.

The MTA originally wanted to raise the retirement age for new hires from 55, require new employees to contribute more to their pensions and to pay part of their health-care premiums.

All these requests sounded like attempts to break existing contractual agreements. In principle, nobody should be able to freely break promises without any consequences. But not all promises are equal. In particular, promises that are based on implicit assumptions which are no longer valid should not have the same moral force as promises whose basic assumptions are still valid.

For example, most defined-benefit pensions were based on life expectancy that most retirees would die within 5 - 10 years after retirement. But if they don't die until 15 - 20 years after retirement due to medical advances, then the basic assumption for the original pension plan has been changed. It is not reasonable to hold the company financially responsible for the unexpected increased cost. It makes some moral sense to grandfather current workers to the existing contract since they have other financial obligations based on their old promises. But it is particularly unreasonable to preserve the same terms for newly hires even though the increased life expectancy has long been in force. And the newly hires have more freedom to get better terms from other employers. It is an abuse of union power to impose terms that are no longer tenable in a changed market situation. To saddle the employer with unreasonable terms is to condemn it to premature death, particularly when it is illegal for transit workers to strike.

In the end, the transit union agreed only to let new hires pay part of their health-care insurance premium. Their retirement age will remain unchanged. And they will not be required to pay more towards their pensions.

The transit workers' strike has proven to be very disruptive because few viable alternative means of transport were available. For a location-bound service, there is no way to import alternative services from foreign countries with cheaper labor. But when the compensation of workers in other industries subject to serious foreign competition is under attack, the opportunity cost and earning power of all workers are adversely affected. The desperate attempt of organized labor to hold on to untenable wages and benefits by causing short-term disruption would simply hasten the offshoring of their jobs to cheaper overseas sources whenever possible.

The strength of a market economy is based on its ability to quickly respond to changing supply and demand conditions. If an economy is prevented from adjusting to changing market situations, it would be only a market economy in name.

References:
  • WSJ. 12/28/2005. "New York transit union board endorses tentative contract."
  • WSJ. 10/17/2005. "Why Delphi's Asia operations are booming."
  • WSJ. 10/28/2005. "Delphi seeks far-reaching givebacks."
  • WSJ. 12/30/2005. "UAW dissidents add to pressure on union's chief."
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