Understanding the Impact of Organized Labor on Supply Chains
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_By Don Maier_
This article was originally published on the blog of the Global Supply Chain Institute at the University of Tennessee, Knoxville. Republished with permission. You can read the original article.
In this series by Associate Professor of Supply Chain Logistics Practice, Don Maier, challenges in maritime cargo transportation are clarified and alternative global trade routes are explored. Reports cover how geopolitical issues impact trade, situations during cargo transfers, and the development of new logistics networks to keep freight flowing.
The reopening of East Coast ports averted another potential disruption to U.S. supply chains. According to J.P. Morgan’s estimates, each day of port closure costs the U.S. economy about $4 billion—approximately $12 billion after three days of strikes. However, the threat of more prolonged strikes has not ended; it is merely postponed until at least January 15, 2025.
The United States Maritime Alliance (USMX)—the negotiating team representing carriers, terminals, and some port authorities—reached a six-year contract with the International Longshoremen’s Association (ILA), including a 62% wage increase, or about 10.3% annually. Other details of the negotiations have not been disclosed, but USMX had proposed tripling the amount paid into ILA members’ pensions and increasing their health benefits. Currently, USMX contributes 100% to union members’ health benefits.
The larger issue on the negotiating table was automation and the increased use of technology in port and terminal operations. Most people may not realize that this is not a new problem. Since Malcom McLean invented the “world-changing” container in 1956, this issue has been discussed and negotiated. As a truck company owner and driver serving the Port of New York and New Jersey, McLean often sat in his truck waiting for unionized dockworkers to unload cargo, thinking, “If they could just lift the trailer directly onto the ship, it would save so much time.” He went on to manufacture intermodal containers, revolutionizing global supply chains and impacting the ILA on the East Coast and the International Longshore and Warehouse Union (ILWU) on the West Coast.
Dock workers did not easily succumb to this “new” technology. In 1964, the ILA staged a strike for higher wages, better benefits, and against intermodal containers. During contract negotiations, unions agreed to use containers in port operations while securing Guaranteed Annual Income (GAI) to compensate for potential job losses due to new technologies. By 1966, GAI guaranteed an average of 1,600 hours paid per year for each ILA member working more than 700 hours (compared to 2,080 hours equaling 52 weeks at 40 hours a week, providing at least 1.3 years’ income annually for dockworkers in the NY/NJ port). GAI was hailed as a union victory, effectively protecting members’ job security and income while accepting the use of new technologies.
By 1974, the value of GAI per member approached six figures, causing significant financial difficulties for port authorities and putting pressure on budgets. Partially due to subsequent strikes in 1977, as well as increased costs of GAI and operating expenses, contract negotiations and payments to ILA shifted from ports to the USMX. In other words, public entities—port authorities—became less financially involved, while responsibility was transferred to the private sector, i.e., carriers.
GAI only nominally ended. Since the late 1970s, the ILA has controlled chassis inspection, maintenance, and negotiations for terms such as “container royalty fees,” where members earn a fee each time a container enters or leaves the terminal, regardless of efficiency.
According to the World Bank and S&P Global Intelligence’s 2024 Port Productivity Report, among the 405 ports measured in the previous year, the best U.S. container port, Charleston, ranked globally at number 53. Most large, high-volume ports on both coasts rank lower, with some near the bottom. This is not due to fewer vessel calls; for example, China’s Ningbo-Zhoushan Port (ranked 12th) had over 4,411 vessel calls, while New York/New Jersey Port had 1,335, ranking 93rd. In fact, only seven U.S. ports are ranked in the top 100. Thus, despite having the highest-paid dockworkers in the world, the container productivity levels in the U.S. are among the worst.
Long-Term Implications
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The United States must address labor costs to some extent to remain competitive or face the reality of no longer being the world’s strongest economy. Port authorities and dock workers should embrace new technologies that, while often domestically developed, are primarily used abroad.
While we navigate through the holiday season, January 15 is approaching. If negotiations do not proceed as expected by ILA, work slowdowns may occur. Contractually, unions have the right to inspect each bulk driver, container, and chassis entering the terminal. In many cases, three to four union members check drivers and equipment. They can slow down and debate every item they see. If safety issues are found, equipment is sent to repair yards (also under union contract control).
Now consider the congestion and traffic that could occur in the coming months and its impact on public perception. Technically, ILA members will be working, ports will remain open, but slowdowns will resonate through supply chains as containers may not be picked up or delivered to terminals on time. These delays will further delay everything imported through our ports, regardless of customer size. It is likely that BCOs (shippers or retailers) of all sizes will see their containers targeted more often. BCOs must consider the impact of detention and demurrage fees per container (the Federal Maritime Commission will also have a say on this). Even marine insurance costs need to be considered and possibly renegotiated, as most contracts do not cover delays.
When the new USMX-ILA master contract is signed, supply chains will face new challenges from labor. Last year, the ILWU negotiated a “historic, record-breaking contract” for its members until 2028—imagine how their demands might grow by then based on ILA’s achievements. Additionally, California Assembly Bill 5 (AB5), which requires companies to reclassify gig workers as employees, and yesterday’s independent drivers becoming today’s unionized employees, must be considered. Similar regulations have been enacted in New York, Massachusetts, and Illinois. Typically, when one union strikes, they receive support from other unions. Truckers may decide to support ILA by refusing to accept cargo from certain ports.
At the federal level, legislators are debating the Warehouse Worker Protection Act, aimed at protecting warehouse workers from productivity targets imposed by employers. Some argue that such goals force employees to work in unsafe conditions. Current workplace safety laws already exist. However, behind the scenes, this new bill will make it easier for truck drivers to organize warehouse workers, particularly at Amazon, a key target for organized labor.
Dock unions seem to be using extremely high wage demands and no automation as bargaining chips. ILA is well aware that automation is coming. What will they get? Recall when Malcom invented the container. Unions received compensation for “lost” jobs while accepting new technologies—a benefit they still receive in some form today.
Conclusion
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Shippers should prepare and budget for a significant increase in transportation costs. Given only labor-related operational cost increases, BCOs should not be surprised if carriers pass these costs on to them. Similarly, BCOs will have no choice but to pass these costs on to their customers, ultimately reaching the end consumer.
How much more per container? Conservatively estimating, BCOs should prepare for at least a 25-30% increase in container costs during the contract period. Remember, this increase is based solely on the current USMX-ILA situation and does not consider any geopolitical conflicts elsewhere or the outcome of the November presidential election.
If our ports are considered national security operations to maintain and support the economy, and ILA demands six-figure incomes and compensation plans, what does that mean for U.S. education systems where K-8 teachers earn an average salary of $69,544 nationally? Priorities in maintaining competitiveness globally may need a reevaluation.
At the 2024 Fall Supply Chain Forum from November 12 to 14 in Knoxville, Maier will co-host a panel discussion on navigating maritime challenges with former South Carolina Ports Authority CEO Jim Newsome and executives from Georgia Ports, Hapag-Lloyd North America, the Federal Maritime Commission, and Louis Dreyfus Company. Don’t miss out. Register now.
### About the Author
_Don Maier is an Associate Professor of Supply Chain Logistics Practice at the University of Tennessee, Knoxville. His maritime series clarifies challenges in sea cargo transportation and explores alternative global trade routes. Through reading about how geopolitical issues impact trade, situations during cargo transfers, and developing new logistics networks to keep freight flowing._
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Source: New SCMR
