The Art and Science of Costing Labor Contracts. (Forum)

By Ashbaugh, Sam | Government Finance Review, December 2002 | Go to article overview

The Art and Science of Costing Labor Contracts. (Forum)


Ashbaugh, Sam, Government Finance Review


Labor is the most costly variable in the provision of public services by state and local governments. In order to make informed policy decisions regarding labor contracts, elected officials and finance officers need an accurate assessment of the financial and operational impact of labor union proposals. Without knowledge of the economic value of salary, fringe benefits, and other provisions of a labor agreement, it is difficult for management to respond rationally to union demands or to develop an acceptable counteroffer that minimizes overall costs and is consistent with government policies and available resources.

Understanding the costs of proposed labor agreements works to the advantage of management during internal strategy sessions, in deliberations with unions, and during dialogue with third parties such as mediators and arbitration panels. In addition, cost analysis provides a baseline for future data analysis, exposes management and business practices that need to be reevaluated, and consolidates labor information from different sources.

Considerations for Negotiating and Costing Compensation-Related Benefits

Although requests for wage or salary increases lie at the heart of most labor negotiations, these requests are likely to be accompanied by proposed increases in other compensation-related benefits such as longevity or holiday pay. Since these benefits are dependent upon salaries and often negotiated at the same time, they too must be carefully evaluated. Unfortunately, they can be difficult to cost without making assumptions. This section identifies the most important considerations for analyzing the costs of five major compensation-related benefits.

Base Compensation Costs. Prior to calculating the economic impact of union labor proposals, it is important to determine the base compensation costs for the bargaining unit(s) in question, since all proposals and potential counteroffers must be analyzed in relation to the current cost of each contract provision. Base compensation figures are essential to the determination of the percentage value of any proposed increase in compensation. Since the union will likely propose increases to multiple forms of compensation, management should identify base compensation costs not only at a macro level, hut also for specific contract provisions such as average salary, average overtime earnings, average longevity pay, average shift differential, and average annual cost for paid holidays.

Wages and Salaries. Calculating the fiscal impact of a union proposal to increase salaries 3 percent each year over the next three years may seem like a pretty straightforward exercise for a financial analyst, and it is. Still, it is important that they emphasize the cumulative impact of the proposed salary increase. In addition, the "ripple effect" of wage and salary increases must be carefully analyzed, since increases in salaries usually result in increased costs for other benefits, including overtime, longevity, shift differentials, holiday pay, vacations, and sick days. Regardless of whether or not a particular union has a contract clause tying its compensation to that of another, it is important to understand that what a government offers to or negotiates with a particular group will have an impact on its discussions with other employee groups, including unionized and exempt employees.

Holiday Pay. When it comes to holiday pay, the first thing to understand is that there is a difference between calculating the cost of holiday pay and calculating the cost of additional paid holidays. For public safety and other critical services that must be provided around the clock, governments often must compensate those employees who work holidays at a significantly higher rate than regular wages. Offering additional paid holidays to employees also affects costs by decreasing the number of hours worked, thus increasing the average cost per hour worked.

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