Understanding the Railroads--Unions Fight: Underlying last fall's labor standoff is the highly competitive U.S. freight transport sector.

• Author: Kemp, David

Last December, at the urging of President Biden, Congress enacted legislation to stop a nationwide railroad workers' strike. Negotiations between the freight railroads and their labor unions over the last three years had faltered over the unions' insistence that any agreement include 15 days of paid sick leave. The contract imposed by the legislation gives workers a 24 percent wage increase and additional lump sum payments, but only one additional personal day.

President Biden's support for government intervention in the labor dispute and imposition of a contract that, overall, can be considered to side with the railroads is interesting given that he professes to be a "pro-labor" president. He justified his decision by citing the potential economic consequences of a railroad strike, arguing in a statement:

As a proud pro-labor President, I am reluctant to override the ratification procedures and the views of those who voted against the agreement. But in this case--where the economic impact of a shutdown would hurt millions of other working people and families--I believe Congress must use its powers to adopt this deal. It is likely that the Biden administration's determination to side with management is a manifestation of a broader decline in union bargaining power. The existence and bargaining power of railroad unions are a legacy of the history of railroad regulation and labor relations. While certain aspects of the industry and the laws governing labor relations have helped rail unions maintain some of the highest private sector membership rates in the United States, since the deregulation of railroads in 1980, union membership has been waning. In the decades following deregulation, rail revenues soared and railroads were able to erode some of the unions' work rules.

Recent declines in railroad revenues have provided more incentive for railroads to cut labor costs, but the existing union work rules have constrained the ways in which railroads can do so. Ultimately, railroads have elected to reduce total employees, increasing the burden on those who remain.

How did this come about? The root cause of the railroads-labor fight is the highly competitive U.S. freight transport sector. As that competition continues, railroads will seek further cost reduction by reducing their labor force and unions will push to protect jobs and increase workers' pay.

HISTORY OF RAIL REGULATION

Federal regulation of railroads began with the creation of the Interstate Commerce Commission (ICC) in 1887. The impetus was pressure from farmers and shippers in the western and southern United States who felt disadvantaged by railroads charging higher freight rates for short vs. long hauls and for small vs. large shippers. State regulations had proven ineffective in curtailing such practices, and in 1886 the Supreme Court ruled that states could not regulate interstate commerce. Congress thus established the ICC, tasked with ensuring that railroads charged reasonable rates and making sure they did not charge different rates for shipping the same commodity based on region or the length of the haul.

At first, the ICC was relatively weak, and was further weakened by Supreme Court rulings limiting its powers. But subsequent acts bolstered the agency through the late 19th and early 20th centuries. The 1920 Transportation Act further expanded the ICC's powers, giving it the ability to set minimum rates and control entry into and exit from rail routes.

Initially, ICC regulation and its constraint on intra-industry competition were welcomed by railroads. Rates set by the ICC helped stabilize profits and avoid price wars, making the ICC essentially a government-led cartel. The tradeoff for the railroads was that, once a line was established, they were only able to abandon it if given permission by the ICC, and approval to exit lines was often difficult to get. In practice, railroads were able to charge higher rates, which helped subsidize continued service on unprofitable lines. For the first 60 years of the ICC, when railroads transported a sizeable majority of interstate freight, this system worked in the railroads' favor.

However, the regulations inhibited rail's ability to respond to the growth of other modes of transportation, particularly the trucking industry, in the 1940s-1960s. The benefits of trucking in delivering high-value manufactured goods, spurred on by the development of the interstate highway system, created direct competition with railroads. The railroads attempted to remain competitive by reducing shipping rates but were often not allowed to do so by the ICC. And the barriers to exiting unprofitable lines hindered railroads' ability to cut costs.

At the same time, railroads faced difficulties reducing labor costs because of large rail unions that derived much of their power from the Railroad Labor Act (RLA) of 1926. The RLA was negotiated by the railroads and labor unions as the final step in a series of railroad labor laws going back to the 1880s. Because of the violence associated with early railroad strikes and their disruption of commerce, the RLA and the preceding laws emphasize mediation of labor disputes and allow for government intervention to avoid strikes.

The RLA has some key differences from the National Labor Relations Act (NLRA) of 1935, which governs labor relations in industries other than railroads (and airlines, which the RLA was extended to cover in 1936). First, the RLA requires that unions be based on class of employee (i.e., craft) and organized on a systemwide basis. The systemwide nature might make unions more difficult to organize initially because it requires 50 percent-plus-one support from all of a company's workers in a particular craft, as opposed to unionization by individual location under the NLRA. But this also gives established unions systemwide bargaining power and makes it impossible to bust a union by simply closing one establishment.

Second, the RLA stresses maintaining the status quo. Union contracts never expire, and any amendments must be negotiated. Labor disputes must be adjudicated through an exhaustive mediation process, governed by the National Mediation Board and potentially with input from a Presidential Emergency Board. The process requires multiple "cooling-off periods" and both labor and management must maintain the status-quo while the mediation procedures unfold. The goal is to avoid disruptions, such as strikes, and through its history the act has been largely successful in doing so.

The effect of the RLA has been the creation of large, nationwide unions for different classes of...