Understanding the Impact of Organized Labor on Supply Chains
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#### Port Strikes Temporarily Subside, but Long-Term Effects Loom
With the reopening of East Coast ports in the United States, another potential disruption to its supply chains has been averted. J.P. Morgan estimates that each day of port closure impacts the U.S. economy by about $4 billion – after three days of strikes, the overall impact was around $12 billion. However, the threat of prolonged strikes is not over; it has merely been postponed until at least January 15, 2025.
The United States Maritime Alliance (USMX), representing shipping companies, terminals, and some port authorities in negotiations, reached a six-year contract with the International Longshoremen’s Association (ILA) that includes a 62% wage increase, or about 10.3% annually. Other details of the negotiation have not been disclosed, but USMX proposed tripling current pension contributions for ILA members and increasing their health benefits. Currently, USMX contributes 100% to union members’ health benefits.
The larger issue revolves around automation and increased technology use in port and terminal operations. This is not a new problem; it has been discussed since Malcom McLean invented the world-changing container in 1956. As an owner-operator of a trucking company serving New York/New Jersey ports, McLean would wait hours for his trailers to be unloaded by union dockworkers. He thought, “If they could just lift the trailer and put it on the ship directly, wouldn’t that save a lot of time?” This led him to build intermodal containers, revolutionizing global supply chains and impacting both the ILA and the International Longshore and Warehouse Union (ILWU) on the West Coast.
Dockworkers have not easily conceded to this “new” technology. In 1964, the ILA launched a strike for higher wages and better benefits while opposing intermodal containers. During contract negotiations, the union accepted the use of containers in port operations but secured guaranteed annual income (GAI) as compensation for potential job losses due to new technologies. By 1966, GAI ensured that each ILA member working over 700 hours received an average wage equivalent to 1,600 hours (compared to 2,080 hours representing a standard 40-hour workweek for 52 weeks, providing at least 1.3 years’ income annually). This was hailed as a union victory, with GAI effectively safeguarding members’ job security and income while accepting the use of new technologies.
By 1974, the value of GAI to each member approached six figures, creating significant financial strain for port authorities and exacerbating economic pressures. Partially due to subsequent strikes in 1977, along with rising costs from GAI and operational expenses, contract negotiations and ILA payments shifted from public entities (port authorities) to private sectors such as shipping companies.
GAI was only nominally ended. Since the late 1970s, the ILA has controlled chassis inspections, maintenance, and repairs while negotiating terms like a “container royalty,” ensuring compensation per container 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 53rd place. Most major high-volume ports on both coasts rank lower, with some near the bottom. This is not due to vessel calls; for instance, China’s Ningbo-Zhoushan Port (ranked 12th) had over 4,411 vessel calls compared to New York/New Jersey’s 1,335 (93rd). In fact, only seven U.S. ports entered the global top 100. In other words, despite having some of the world’s highest-paid dockworkers, the United States has among the lowest container productivity rates.
Long-Term Implications
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The United States must eventually address labor cost issues or risk declining competitiveness and losing its status as the world’s most powerful economy. Port authorities and dockworkers need to embrace new technologies that are largely developed domestically but predominantly used overseas.
While holidays will pass smoothly, January 15 is approaching. If negotiations do not favor the ILA, work slowdowns may occur. Per contract terms, unions have the right to inspect every truck driver, container, and chassis entering the terminal. In many cases, three to four union employees check drivers and equipment. They can slow down operations and debate each inspection finding. Any safety issues found send equipment for repairs at facilities controlled by union contracts.
Consider public perception over the next few months due to congestion and traffic. Officially, ILA members will work, and ports will remain open; however, slowdowns will resonate through supply chains as containers may not be picked up or delivered on time from terminals. These delays delay all imports through our ports, regardless of customer size. Larger BCOs (shippers or retailers) are likely to face more scrutiny for their containers. BCOs must consider the impact of detention and demurrage fees (the Federal Maritime Commission also has a say). Even marine insurance costs need consideration and possible renegotiation as most contracts do not cover delays.
> It seems that dockworker unions are demanding very high wages without bargaining on automation. The ILA is smart enough to know that automation is coming. What will they get? Think about when Malcom created the container. Unions accepted new technology adoption if compensated for “lost” jobs, a compensation they continue to receive in some form.
When the new USMX-ILA master contract is signed, supply chains face fresh labor challenges. Last year, ILWU negotiated a “historic and record-breaking” contract for its members through 2028 – imagine their demands when contracts expire based on ILA’s achievements. Additionally, consider California Assembly Bill 5 (AB5), which requires companies to reclassify gig workers as employees; yesterday’s owner-operators are today’s employees eligible for truck driver union membership. Similar regulations have been introduced in New York, Massachusetts, and Illinois. Typically, when one union strikes, they receive support from fellow unions. Truck drivers’ unions might decide to support the ILA by refusing certain port goods.
At the federal level, lawmakers discuss the “Warehouse Worker Protection Act,” aiming to protect warehouse workers from employer-imposed productivity targets that some argue force unsafe work conditions. Existing workplace safety laws are in place. However, behind the scenes, this new bill will allow truck driver unions easier organization of warehouse workers, particularly at Amazon, a key union target.
It seems that dockworker unions are demanding very high wages without bargaining on automation. The ILA is smart enough to know that automation is coming. What will they get? Think about when Malcom created the container. Unions accepted new technology adoption if compensated for “lost” jobs, a compensation they continue to receive in some form.
Conclusion
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Shippers should prepare and budget for significant increases in transportation costs. Given increased operational labor costs alone, BCOs should not be surprised by cost pass-through from shipping companies. Similarly, BCOs will have to transfer these costs to their customers, ultimately reaching the end consumer.
How much more per container? Conservatively, BCOs should prepare for at least a 25-30% increase in container costs throughout the contract period. Remember that this estimate is based on a strict calculation of 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 supporting economic maintenance, what does the ILA’s six-figure income and compensation scheme mean for U.S. education systems? The average salary for K-8 teachers in the United States is $69,544. National priorities to maintain global competitiveness may need reassessment.
_In the fall of 2024 at the Supply Chain Forum (November 12-14), Maier will co-host a panel on maritime challenges with former South Carolina Ports Authority CEO Jim Newsome and senior leaders from Georgia Ports, Hapag-Lloyd North America, the Federal Maritime Commission, and Louis Dreyfus Company in Knoxville. Register now._
### About the Author:
_Don Maier is an associate professor of practice in supply chain logistics at the Haslam College of Business, University of Tennessee, Knoxville, and author of the Ocean Shipping series. His career includes roles on logistics and supply chain management teams at FedEx, Office Depot, Penske Logistics, Monsanto, and Merisant (a subsidiary of Monsanto). He played a significant role in designing and leading international logistics operations strategies for North America and Central America and managed the design and development of Merisant’s production manufacturing quality culture, focusing on 5S and lean principles. During this time, Maier earned his Ph.D. in organizational development and an M.S. in organizational behavior from Benedictine University in Lisle, Illinois, while teaching various management-related courses._
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Source: New SCMR
