How a Regional Pay Scale Could Save the Postal Service

Issue Brief

The U.S. Postal Service faces a troubling financial future. Both the GAO and a Presidential commission concluded that it must be substantially reformed to reduce the risk of taxpayer bailouts or dramatic price increases. For federal policymakers seeking to improve its financial outlook, one important step would be to lower labor costs by adopting a regional pay scale for all new employees.

Such a change would need to be mandated by Congress – a steep hurdle politically given the pressure Members would likely face from postal unions in their home constituencies. However, given the clear consensus that the current system is unsustainable, there are no painless solutions.

What makes this common-sense proposal feasible is the simple reason that it would not affect current USPS employees, only new hires. It would also significantly lower the risks of future taxpayer-funded bailouts. In fact, this proposal would benefit current USPS employees because it would dramatically improve the Postal Service’s financial outlook.

Under such a system, the compensation of new postal hires would reflect the cost of living where they work. Currently, postal employees are paid according to one-size-fits-all contracts negotiated by their different unions, which do not take regional differences in cost of living into account.

The fact is, a letter carrier in New York has a much higher cost of living than a carrier in New Mexico. For instance, a person earning $50,000 per year in Albuquerque would have to earn $95,000 to support an equivalent lifestyle in Manhattan. It simply doesn’t make sense for them to receive equal compensation for the same work. A regional pay scale could be based on the Labor Department’s Consumer Price Indexes making it fair and equitable.

If the Postal Service is ever to achieve a sound financial footing, it must act quickly to curb its labor costs. Incorporating a cost of living index into wage scales would do that in a fair, equitable way.

Today, labor accounts for nearly 80 percent of USPS costs. These costs are rising despite downsizing and cost-cutting efforts. “In fiscal year 2004, Service compensation and benefit costs increased $1.7 billion, despite a decrease of nearly 22,000 career employees from the prior fiscal year,” according to the GAO.

Postal Service compensation is very generous compared to private sector salaries. According to the President’s Commission, new postal hires receive, on average, a 28.4 percent wage increase from their previous jobs. In the private sector, new hire increases average just 4 percent. As a result, there are long lines of candidates for postal jobs, and extremely low quit rates. Further, this wage premium contradicts the Postal Reorganization Act of 1970, which states that Postal Service pay should be comparable to that of the private sector.

Dr. Charles Guy, is adjunct fellow with the Lexington Institute and former Director, Office of Economics, Strategic Planning, U.S. Postal Service.