U.S. air carriers and work-rule constraints – Do airlines employ an allocatively efficient mix of inputs?

Abstract

Past research on the allocation of factor inputs for the airline industry suggests an overutilization of labor relative to other inputs immediately following deregulation. This study argues rigid work rules in conjunction with productivity improvements of nonlabor inputs may create an incentive for carriers to under-invest in labor relative to nonlabor inputs. Findings derived from estimating a long-run shadow cost function for this industry suggest that airlines over-employ non-labor inputs relative to labor. Simulations suggest potential savings ranging from 13 to 14 percent derived from satisfying the conditions of allocative efficiency for carriers in the study's sample.