Understanding organized labor’s impact on our supply chain

By Don Maier

This article first appeared on the University of Tennessee, Knoxville’s Global Supply Chain Institute’s blog. It is being reprinted with permission. You can read the original post here.

The Maritime Shipping series with Don Maier, associate professor of practice in supply chain logistics, clarifies the challenge of how goods are moved on the high seas and investigates alternative global trade routes. Read about the consequences of geopolitical issues affecting trade, what happens when cargo is diverted, and developing new logistics networks to keep freight flowing.

With the reopening of the East Coast ports, the United States avoided another potential disruption to its supply chain. J.P. Morgan estimated that each day the ports were closed cost the US economy approximately $4 billion—a roughly $12 billion impact after three days of strikes. Yet the threat of a potentially longer strike isn’t over, only delayed until at least January 15, 2025.

The U.S. Maritime Alliance (USMX)—the negotiating team representing shipping lines, terminals, and some port authorities—and the International Longshoremen’s Association (ILA) agreed to a wage increase of 62% over the six-year contract, approximately 10.3% each year. Other details from negotiations have yet to be released, yet the USMX had offered to provide three times the current amount paid to ILA member pensions as well as an increase to their health benefits. Currently, the USMX contributes 100% to the union member’s health benefits.

The much larger issue on the negotiating table is automation and the increased use of technology in port and terminal operations. Most may not realize that this is not a new issue. It has been debated and negotiated since the container “that changed the world” was invented by Malcom McLean in 1956. As an owner and driver for a trucking company serving the Port of New York and New Jersey, McLean would sit in line for hours waiting for his trailer to be unloaded by the unionized dockworkers. Thinking to himself, “Wouldn’t it be nice if they could just pick up the trailer and set it on board to save a lot of time?” he went on to build the intermodal shipping container, revolutionizing the global supply chain and impacting the ILA and the ILWU (International Longshore & Warehouse Union) on the west coast.

Longshoremen did not go down without a fight against that “new” technology. In 1964, the ILA conducted a strike to fight for higher wages, better benefits, and against the intermodal container. During contract negotiations, the union accepted the use of the container in port operations while also receiving a Guaranteed Annual Income (GAI) for the potential loss of jobs from the new technology. In 1966, the GAI guaranteed an average of 1,600 hours of pay for every ILA member who worked more than 700 hours. (By comparison, 2,080 hours equates to a 40-hour workweek at 52 weeks, providing the NY/NJ longshoremen with at least 1.3 years’ worth of income each year). Heralded as a win for the union, the GAI effectively protected members’ job security and income while accepting the use of new technology. 

By 1974, GAI was worth close to six figures for each member, which caused significant financial woes for the port authorities, putting financial strain on the program. Partly due to a later 1977 strike, as well as the cost of the GAI and increasing operating expenses, the responsibility for contract negotiations and payment to the ILA shifted from the ports to the USMX (United States Maritime Alliance). In other words, the public entities—port authorities—were less involved financially, with the responsibility transferred to the private sector, the shipping lines.

The GAI ended in name only. Since the late 1970s, the ILA has had control over chassis inspections, maintenance, and repair work, while negotiating for terms such as a “container royalty fee,” whereby members earn a royalty for each container moved in and out of the terminal, regardless of efficiency.

According to the Port Productivity Report for 2024 published by the World Bank and S&P Global Intelligence, of 405 ports measured the prior year, the best US container port, Charleston, ranked 53rd globally. Most large, high-container volume ports on both coasts ranked much lower, near the bottom in some cases. And it wasn’t as a result of ship calls either; for comparison, the Port of Ningbo-Zhoushan in China (12th) had over 4,411 ship calls, while the Port of NY/NJ had 1,335 and ranked 93rd. In fact, only seven US ports were ranked among the Top 100. In other words, US longshore employees are the highest paid in the world despite having some of the worst container productivity levels.

Long-term impacts

At some point, the US must address labor costs to be competitive or face the reality that it may no longer be the strongest economy in the world. Port authorities and dockworkers should embrace new technology that, in most cases, was developed domestically yet is used mostly abroad.

Even though we’ll get through the holiday season, January 15 is right around the corner. Should negotiations not favor the ILA, there will be work slow-downs. Contractually, the union is authorized to inspect every dray driver, container, and chassis that enters the terminal. In many cases, 3-4 union members inspect the driver and equipment. They can all walk slower and can debate each item they see. If they identify a safety concern, the equipment is sent to the maintenance yard for repairs (also controlled by the union contract). 

Now, consider the public perception that may stem from the congestion and traffic over the next months. Officially, ILA members will be working, and the ports will be open, yet the slow-downs will reverberate throughout the supply chain as containers may not be picked up or delivered to the terminals on time. These delays will cause further delays in receiving everything imported through our ports regardless of the size of the customer. It’s very possible that the larger the BCO—shipper or retailer—the more targeting their containers will experience. BCOs must consider the impact of detention and demurrage charges on each container (the Federal Maritime Commission will have a say on that matter, too). Even marine insurance charges need to be considered and potentially renegotiated, as most insurance contracts do not cover delays.

When the new USMX-ILA master contract is signed, the supply chain will face new challenges from labor. Last year, the ILWU negotiated a “historic, record contract” for its members through 2028—imagine how their demands may increase by that contract’s expiration based on the ILA’s achievements. Also consider California Assembly Bill 5 (AB5), a law requiring that companies reclassify gig workers as employees, and how yesterday’s owner-operators are becoming today’s employees, making them eligible for unionization by the Teamsters. New York, Massachusetts, and Illinois have already introduced similar regulations. Typically, when one union strikes, they receive support from brothers in other unions. Teamsters may decide to support the ILA by refusing to accept loads to or from certain ports.

At the federal level, legislatures are debating the Warehouse Workers Protection Act, designed to protect warehouse employees from employers enacting productivity goals. Some believe these types of goals force employees to work unsafely. Current workplace safety laws are already in place. Yet behind the scenes, the new bill would allow the Teamsters to more easily organize warehouse workers, particularly at Amazon, a prime target for organized labor.

It appears the dockworkers’ unions are demanding extremely high wages and no automation as a bargaining chip. The ILA is smart enough to realize that automation is coming. So, what will they gain? Think back to when Malcom created the container. The union accepted the adoption of the new technology as long as they were compensated for the “loss” of jobs, a benefit they still receive today, in one form or another.

Conclusion

Shippers should prepare and budget for a significant increase in transportation costs. Given the increase in operating costs in labor alone, BCOs should not be surprised when shipping lines pass those costs along. Similarly, BCOs will be forced to pass those costs onto their customers and, eventually, the end consumer.

How much will the cost per container increase? By conservative estimates, BCOs should prepare for at least a 25-30% increase in container costs over the course of the contract. Keep in mind that such an increase is based strictly on the current USMX-ILA situation. It does not consider any geopolitical conflict anywhere else in the world nor the result of November’s presidential election.

If our ports are considered a national security operation to maintain and support the economy and the ILA demands six-figure incomes with compensation packages, what does this say about the US education system where the national average salary for K-8 teachers is $69,544? Our national priorities for remaining competitive on a global scale may need to be reevaluated.

At the Fall 2024 Supply Chain Forum in Knoxville from Nov. 12–14, Maier will co-moderate a panel on navigating maritime challenges with former South Carolina Port Authority CEO Jim Newsome and senior leaders from Georgia Ports, Hapag-Lloyd North America, the Federal Maritime Commission, and Louis Dreyfus Company. Don’t miss out. Register today.

About the author

Don Maier is an associate professor of practice in supply chain logistics at the University of Tennessee, Knoxville. His Maritime Shipping series clarifies the challenge of how goods are moved on the high seas and investigates alternative global trade routes. Read about the consequences of geopolitical issues affecting trade, what happens when cargo is diverted, and developing new logistics networks to keep freight flowing.

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