For months, the world’s largest economy has been teetering on the brink of collapse because America’s latter-day robber barons can’t comprehend that workers sometimes get sick.
Or so the behavior of major U.S. rail companies seems to suggest.
Since last winter, railroad unions and the managers of America’s seven dominant freight-rail carriers have been struggling to come to an agreement on a new contract. The key points of contention in those talks have been scheduling in general and the provision of paid leave in particular. Unlike nearly 80 percent of U.S. laborers, railroad employees are not currently guaranteed a single paid sick day. Rather, if such workers wish to recuperate from an illness or make time to see a doctor about a nagging complaint, they need to use vacation time, which must be requested days in advance. In other words, if a worker wants to take time off to recover from the flu, they need to notify their employer of this days before actually catching the virus. Given that workers’ contracts do not include paid psychic benefits, this is a tall order.
When management refused to give ground on leave earlier this year, rail workers threatened to strike. If they went through with such a labor action, the rail workers would not merely erode their employers’ profits but also upend the broader U.S. economy. Rail lines remain key arteries of American commerce, carrying 40 percent of the nation’s annual freight. A single day without functioning freight rail would cost the U.S. economy an estimated $2 billion. And such costs could multiply overtime. When fertilizer goes undelivered, crop yields decline and the price of food rises. When retailers can’t access new goods shipments, shortages ensue, and so on.
Congress has long recognized the social costs of railway-labor disputes. In 1926, the federal government gave itself broad powers to impose labor settlements on the rail industry. In September, the Biden administration utilized such power to broker a tentative agreement between the leaders of a dozen unions and the railroads. Under that bargain, the companies agreed to a 24 percent pay increase by 2024, annual $1,000 bonuses, and a freeze on health-care costs. On the key point of leave, however, the railroads conceded only a single paid personal day, plus the removal of some disciplinary penalties for time missed as a result of a medical emergency.
When the deal was put to a vote before all members, four of the 12 unions declined to ratify the compromise. With multiple unions voting down the agreement — and others promising solidarity if their peers decide to walk off the job — the threat of an impending rail shutdown once again hangs over the U.S. economy.
In recent days, the Biden administration has sought to nullify that threat by asking Congress to impose the tentative agreement on the industry before the strike deadline of December 9. Progressives in the House and Senate are pushing to add seven paid sick days to the tentative agreement. But any legislative resolution to the crisis will need to overcome a Republican-led filibuster in the Senate, which means ten Republicans would need to join a unified Democratic caucus in imposing a settlement more pro-union than that which the Biden administration brokered. As of this writing, the odds that Senate Majority Leader Chuck Schumer can assemble such a coalition look long.
All of which invites the question: Why do these rail barons hate paid leave so much? Why would a company have no problem handing out 24 percent raises, $1,000 bonuses, and caps on health-care premiums but draw the line on providing a benefit as standard and ubiquitous throughout modern industry as paid sick days?
The answer, in short, is “P.S.R.” — or precision-scheduled railroading.
P.S.R. is an operational strategy that aims to minimize the ratio between railroads’ operating costs and their revenues through various cost-cutting and (ostensibly) efficiency-increasing measures. The basic idea is to transport more freight using fewer workers and railcars.
One way to do this is to make trains longer: A single 100-car train requires less track space than two 50-car ones since you need to maintain some distance between the latter. More critically, one very long train requires fewer crew members to run than two medium ones.
Another way to get more with less is to streamline scheduling so that trains are running at full capacity as often as possible.
All this has worked out poorly for rail workers writ large. Over the past six years, America’s major freight carriers have shed 30 percent of their employees. To compensate for this lost staffing, remaining workers must tolerate irregular schedules and little time off since the railroads don’t have much spare labor capacity left.
Of course, the railroads are in the business of moving freight, not creating jobs. In theory, if these firms could cut labor costs without degrading service, the broader economy could benefit. The railroads could pass on their savings to shippers in the form of lower rates, thereby putting downward pressure on a wide range of consumer prices. Furthermore, the more cost-competitive freight rail becomes relative to trucking, the lower the American economy’s carbon emissions will be.
Thus, according to the rail barons’ boosters, P.S.R. represents an innovation that is good for shippers, consumers, and the planet but bad for America’s least productive rail workers. The rail unions’ opposition to P.S.R. is therefore, in this account, myopically self-interested and contrary to the greater good.
Unfortunately, P.S.R. works better in theory than in practice — at least for every stakeholder besides the activist investors who imposed P.S.R. on the industry in the first place.
For shippers, the problems with P.S.R. are twofold. First, and most fundamentally, the dominant rail firms feel little need to pass on the fruits of their “efficiencies” to their customers. Decades of consolidation have left the U.S. with only seven Class I railroad companies. Four of those companies collectively control more than 83 percent of the freight market. And the vast majority of train stations in the U.S. are served by exactly one railroad.
Thus, most shippers can’t credibly threaten to take their business elsewhere. At the margin, rail customers could shift their transport needs toward trucking, but most are reliant on the inherent scale and efficiency of rail transport. So when freight carriers reduce their operating costs, they’re less inclined to pass on those savings in the form of improved customer service or lower rates than to simply shower their shareholders in dividends.
Last year, the seven dominant North American railways had a combined net income of $27 billion, nearly twice their margin a decade ago. In the interim, the railways have collectively doled out $146 billion in dividends and stock buybacks while investing only $116 billion into their businesses.
The second problem with P.S.R., from the shippers’ standpoint, is that its scheduling is less precise than advertised. Eliminating spare labor or train cars may render railroads more efficient mechanisms for translating investment into profits. But such fragile systems aren’t necessarily efficient for bringing freight from one place to another, especially in a world where natural disasters and public-health crises exist.
In early 2021, when the acute phase of the COVID pandemic ended and economic demand spiked, freight carriers’ operations were derailed by their own “efficiencies.” For a week last July, Union Pacific had to suspend service between Chicago and Los Angeles while it reopened shuttered rail ramps and reconfigured operations in order to keep pace with rising orders. Similar disruptions afflicted the other major carriers, as The American Prospect details.
By summer 2022, the freight carriers were still failing to meet customer expectations. In a July survey from the American Chemistry Council, 46 percent of chemical manufacturers said rail service was getting worse, while just 7 percent said it was getting better. “Freight rail has been a constant thorn in our side and been a significant challenge for our members for quite some time,” Chris Jahn, the council’s chief executive, told the New York Times in September.
And this is why the freight carriers won’t give ground on paid leave: Already understaffed and underperforming, the railroads cannot allow unanticipated absences to become significantly more prevalent without either pulling back from P.S.R. or suffering even more frequent disruptions and customer complaints.
And the track to a more resilient (if less “precise”) operating system is blocked by the company’s shareholders.
A decade ago, the activist investor Bill Ackman won a proxy battle at Canadian Pacific and proceeded to replace its management with a team led by Hunter Harrison, the railway executive who’d pioneered P.S.R. After imposing the gospel of “more with less” at Canadian Pacific, Harrison left to spread the good news to the freight giant CSX. At each firm, P.S.R. succeeded at generating higher returns. Pretty soon, major investors in other railroads started calling on their firms to imitate Harrison’s methods. Testifying to the government’s Surface Transportation Board about freight rail’s performance last spring, industry analyst Rick Paterson said, “Lurking in the background is the constant threat of shareholder activism if any of the railroads’ operating ratios become outliers on the high side.”
The freight carriers can afford to make concessions on pay. It isn’t that painful to increase wages by a sizable amount when you’ve recently slashed your head count by 30 percent (and hope to continue innovating your way to a smaller payroll in the years to come). But providing rail workers with ordinary time-off benefits would threaten the industry’s core business strategy, an operating procedure that has helped to nearly double its profits over the past decade.
That strategy is predicated on treating rail workers as if they were nearly indistinguishable from the railcars they drive. The typical railcar requires maintenance at predictable intervals and does not require an unanticipated day off to see a doctor about an unexplained pain or to visit a loved one in the hospital. But workers often do.
Last June, one middle-aged union engineer postponed a doctor’s visit for work then died of a heart attack on the job weeks later. A conductor who spoke with the Times began feeling rundown last year but declined to see a doctor for fear of being disciplined for taking an unplanned day off. Instead, he waited months for the next doctor’s appointment that aligned with a scheduled day off. He then learned he’d been suffering from an infection that could have been treated with medication weeks earlier but would now require surgery.
With a combined $27 billion in net income, the railroads can afford to give their workers paid leave and hire more staff to ensure the stability of their operations. Tolerating such slack might well improve customer service by rendering the railroads more resilient against disruptions.
But that would require the railroads’ owners to accept a cut in their passive income. They do not want to do that. And if all goes well on Capitol Hill in the next few days, they won’t have to.