The Impact of Unionization on Motor Carrier Costs

By Kerkviet, Joe; McMullen, B. Starr | Economic Inquiry, April 1997 | Go to article overview

The Impact of Unionization on Motor Carrier Costs


Kerkviet, Joe, McMullen, B. Starr, Economic Inquiry


I. INTRODUCTION

The increasingly competitive markets fostered by the Motor Carrier Act of 1980 have forced motor carriers to focus on cost saving strategies intended to reduce operating miles, fuel consumption, and capital and labor expenses. There are two reasons unions firms may be at a competitive disadvantage in these efforts. First, although the union/nonunion wage differential has decreased following regulatory reform, Rose [1987] and Hirsch [1988] find that union firms still pay higher wages. Second, managers of unionized firms may have less flexibility in the use of inputs since union work rules restrict the activities and substitutability of drivers, terminal workers, and terminal facilities. Indeed, Harrington [1987] reports that post-1980 trucking expenses are still 40% higher for unionized motor carriers than for nonunion firms. Unionization may affect carrier cost both by increasing the price of labor and by potentially affecting cost function parameters. If union rules make labor less productive, the entire cost function will shift upwards for a given set of factor input prices. Further, Freeman and Medoff [1982] argue that work rules may be expected to result in reduced elasticities of substitution between labor and other inputs in the unionized setting. Indeed, they find that substitution between production labor and other labor in manufacturing is generally lower in unionized settings.

The impact of unionization on production has been investigated in industries such as construction, coal mining, hospitals, and the cement industry by Allen [1984; 1986a; 1986b], Byrnes et al. [1988] and Clark [1980a; 1980b]. The results have been inconclusive, with unionized firms being more productive than nonunion firms in some instances and less productive in others. Studies such as Allen [1986c] and Addison and Hirsch [1989] have utilized production function methodologies that use restrictive functional forms which impose homogeneity and identical elasticities of substitution between pairs of inputs.

Allen [1986c] examines the relative efficiency of union and nonunion firms with a translog cost function, allowing for union effects using intercept and slope parameters that vary by union status. In his study of different types of construction projects, he finds significant differences between the cost functions for union and nonunion firms, but no evidence of the inelasticity of factor substitutions as hypothesized by Medoff and Freeman. In fact, his estimates of factor demand elasticities show no discernible pattern for union versus nonunion firms, leading him to conclude that work rules do not have the anticipated impact on elasticity.

The purpose of this study is to test whether unionization impacts motor carrier costs and, if so, to determine the direction of the impact. Of particular interest is whether the work rules imposed by the Teamster's union have had a significant impact on factor substitutability in unionized firms as argued by Freeman and Medoff [1982].

Friedlaender and Spady [1981], Daughety et al. [1985], McMullen and Stanley [1988], Grimm et al. [1989] and Ying's [1990] studies of motor carrier industry costs have used translog cost functions which implicitly assume that union and nonunion cost functions arise from the same production technology. This is equivalent to accepting the hypothesis that unionization does not affect the production structure of motor carrier firms. If unionization does affect a firm's production process, the results from these studies could be biased.

Accordingly, this study uses a translog cost function to test for differences in the cost structure of union and nonunion carriers. Not only is the translog cost function standard in the motor carrier literature, permitting comparison of these results with those of previous work, it also allows the flexibility necessary to examine the differential impact of unions on cost function parameters and elasticities of substitution between factors. …

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