* The New York City transit strike is not likely to have a noticeable effect on near-term economic activity -- certainly not for the national economy and quite probably not for the local economy either. We base this conclusion on judgments that (1) the strike is not apt to last long, (2) widely circulated estimates of its per-day effect include items that are not lost output, (3) offsets are inevitable, and (4) the strike spawns activity that would not have occurred otherwise.
* That said, in an economy operating at full employment, the ultimate settlement of this dispute could signal the onset of wage acceleration in the public sector. It will also provide an interesting test of whether public-sector pension costs can be altered in this environment.
New York City Transit Strike -- Economic Effect Will Be Hard to See
The Transit Workers Union (TWU) in New York City went on strike this morning, shutting down the subway, city buses, and some commuter train service. Some have asked how the strike is likely to affect economic activity. Although it has been disruptive to many who work and live in and around the city, we think the effect on economic activity will be small -- certainly for the national economy and quite probably for the local economy as well -- for the following reasons:
1. The strike is not apt to last long. In the wake of a similar strike in 1966, New York State passed legislation -- the Taylor Law -- that establishes the right of public-sector employees to organize but also prohibits strikes by public- sector employees. Penalties include heavy fines as well as the potential for injunctive relief. As a result of these heavy costs, most public-sector New York City strikes since the mid-1960s have been relatively short. For example, the last transit strike -- in April 1980 -- lasted only 11 days. Workers were fined two days' pay for each day missed, and the TWU lost its 'check-off' ability to deduct union dues from paychecks. (For those with creative minds, we regret to report that taxpayer strikes do not work the same way.)
2. Prevailing cost estimates are too high, in part because they include items that are not lost output. Mayor Bloomberg has been quoted as saying that the strike could 'cost' the city $400 million per day. For a city whose gross annual product is about $420 billion, this is a big number -- too big, in fact, to be credible (more than 20% of the city's output when both are expressed at annual rates). One reason is because the figure includes not only lost economic activity but costs such as extra police pay, which would actually stimulate economic activity and lost tax revenue, which effectively double-counts any activity that would be lost.
3. Offsets are inevitable, both in time and location. Even the more conservative $200-million per day estimate put forth by the New York State Comptrollers' office, which purports to gauge 'lost economic activity and productivity,' will not capture inevitable offsets. For example, many people who would otherwise come into the city to shop will do so in the suburbs or on the Internet if the remaining time permits. The same holds true for workers in today's world of laptops, PDAs, and cell phones (none of which existed in the 1980 strike). Others will make up foregone purchases and production once the strike is over, although this is highly unlikely for activity that is time-sensitive, such as restaurant meals. (Caffeine addicts, for example, are unlikely to double-up on the coffee they could not buy this morning at the local shops.)
4. The strike also spawns activity. For example, many companies have arranged transportation and lodging for key employees. This not only minimizes the disruption to their operations; in the process, it creates activity that would otherwise not have occurred. In the more routine rhythm of the city, taxi cabs and limousine services also benefit from the strike, at least in theory. (Initial news reports suggest that this has not been so clear for cabs.)
Bottom line on near-term economic effects: Although probably negative, the strike's net effect is likely to be small unless the walkout drags on for much longer than seems likely.
That said, resolution of the transit strike could provide some important signals on two issues of longer-term interest -- wage determination and public-sector pension costs.
1. It could signal the onset of public-sector wage acceleration in a fully employed economy. The TWU chose to strike -- and thereby incur the costs noted above -- despite an eleventh-hour offer by the Metropolitan Transit Authority (MTA) that substantially sweetened the wage component of the deal, to annual increases of 3%-4% over the next three years (plus reduced employee contributions for health insurance). Although wages are not the sole issue in the dispute, the union's decision to strike implies a judgment that it can do better in a world of 5% unemployment. If this judgment bears out, then other public-sector unions may look to this settlement as a pattern-setting agreement. State and local workers are among the most highly unionized workers in the country.
2. It will also provide an interesting test of what side has the upper hand in influencing public-sector pension costs. Although the TWU and MTA are not supposed to negotiate the terms of pensions, the issue has come up and is an important one dividing the two parties. In an effort to contain its pension costs, the MTA seeks to increase the contributions of new hires and to make age 62 a mandatory minimum retirement age for them. In contrast, the TWU is looking to lower the existing age for full pension benefits to 50 from the current 55. The authority to make any changes resides with the state legislature. However, the two parties can agree to propose some formula for change to the legislature. Which one 'wins' on this issue will be another important measure of bargaining power in a tight labor market.
Ed McKelvey/Sara Aronchick