Railroad Staffing Issues Show High Wage Inflation to Continue

Yesterday, the Wall Street Journal published an article on railway staffing issues that reflects economy-wide issues and highlights how much inflation is still in the pipeline. Congress has just mandated that railway workers do not strike, without granting them the paid sick leave they wanted. This solved the short-term issue of a crippling strike in the busiest retail period of the year. 

What Congress’ intervention did not solve, however, is railroads’ chronic understaffing that has made them ration the capacity they offer to their customers. This has led to multiple complaints from agriculture, industry and retail. 

Since 2016, the seven largest railroads cut their workforce by 29%. In addition, when Covid struck, railroads followed their customary pattern of massively furloughing excess employees. Furlough increases the share of the decline in revenues borne by workers rather than by railroad profits. 

The problem was, the economy snapped back faster than expected, and some of the furloughed employees turned out unwilling to return to work – at least not at the wage and benefit levels the railway were offering. Railroads are claiming they are well on their way to resolving staffing and capacity issues, but the complaints from users keep coming.

There is a simple way the railroad companies, which have reported strong profits in recent years, could resolve staffing and capacity issues: higher wages. Railroads’ refusal to do so is typical of industries with market power: restricting supply, including by not hiring more workers, allows them to charge higher prices to their customers. 

Railroads have been for years resisting the Surface Transportation Board’s (STB, the railroads regulator) attempt to introduce more competition, including by making them share infrastructure with competitors.

But political and economic pressure to resolve capacity issues is rising. The railroads will eventually have to bite the bullet and offer attractive wages and benefits. These may well turn out above and beyond the agreement just imposed by Congress. 

The railroads have strong market power. It is very likely that if they raised wages, they would also raise their prices. And because the US economy has become so concentrated, there is a good chance that, in turn, the railroad customers would also try to pass on higher freight costs to their own customers.

These issues (market power, unwillingness or inability to offer high enough pay to resolve staffing and capacity shortages) exist across the US economy. This is evidence in, for example, the collapse in the ratio of actual hires to job openings in the JOLTS data (Chart 1). 

With a very tight labour market and strong consumer demand, employers are likely to eventually offer wages high enough to fill their vacancies and meet the demand for their products. The acceleration in wage growth we saw in Friday’s NFP is likely the start of a trend rather than a pattern (Stronger Wage Growth Ahead).

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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