What Drives the Increasing Costs of Transit Operations? The Implications of Labor Productivity, Contracting Out, and Unionization

TitleWhat Drives the Increasing Costs of Transit Operations? The Implications of Labor Productivity, Contracting Out, and Unionization
Publication TypeConference Paper
Year of Publication2017
AuthorsMorales-Sarriera J, Salvucci F, Zhao J
Conference NameTransportation Research Board 96th Annual Meeting
KeywordsBaumol’s cost disease, Contracting Out, Cost escalation, Labor Unions, Transit
Abstract

Unit costs measured as operating costs per vehicle mile in the public transit sector have increased significantly above the inflation rate in recent decades in the United States, regardless of mode and location. This paper examines the impact of (lack of) productivity growth, union bargaining power, and contracting out on cost escalation. We draw from a 17-year (1997-2014) and 438-agency panel of 8,276 observations by mode (bus vs. rail) and type of operations (directly operated by the agency vs. contracted out). We have three main findings: First, the unit cost increase in public transit sector is worse than what the Buamol disease predicts—i.e. more than the growth rate that would occur if transit wage rate increases were equal to those prevailing elsewhere in the economy. Second Contracting out tends to reduce unit costs, suggesting that the costs savings from private operations are partly explained by lower wages to workers. However, while overall costs are lower in contracted services, cost escalation in medium and large private bus operators is no different than in large public transit operators, and the cost savings are larger when the transit agency also directly operates a share of the overall transit service. Third, unique transit labor laws are a likely driver of the unit cost growth above inflation. Overall, these factors reflect inherent characteristics of the transit sector, such as the nature of low productivity growth and union bargaining power related to the need for public subsidy. They drive increase in both transit fares and public subsidy at rates higher than inflation, and play an important role in the deterioration of transit agencies’ financial sustainability.