More than 240,000 postal employees who deliver the mail in the nation's cities will receive substantial pay raises over the next three years under an arbitration decision that resolved bargaining disagreements between the U.S. Postal Service and the National Association of Letter Carriers.

Perhaps more important, the binding agreement moves the letter carriers up a notch in Postal Service pay grades. The shift to a higher pay classification, which increases salaries by about 3 percent, takes effect in the third year of the contract. At that point, for the first time since 1907, letter carriers will be paid at a higher rate than postal clerks.

Postal officials said the decision will cost hundreds of millions of dollars but said yesterday they were still reviewing the financial impact of the decision, which the arbitration panel issued Sunday.

On average, the annual base salary of a letter carrier will increase $1,615, to $37,508, when the contract starts Nov. 20. In 2001, the average letter carrier will make $40,221 in base pay, postal officials said.

R. Theodore Clark Jr., the Postal Service appointee to the arbitration panel, called the decision to pay letter carriers more than postal clerks "shocking." In his dissent, Clark said the decision "will have extremely negative consequences for the future of Postal Service collective bargaining and the Postal Service's ability to remain competitive in the marketplace."

But arbitration panel chairman George R. Fleischli said the pay increase was justified because automation and other workplace changes "have made the work of city letter carriers significantly more difficult."

Letter carriers are handling more mail and frequently must juggle envelopes, magazines and parcels on their routes, Fleischli wrote in the arbitration ruling. "It has become both physically and mentally more difficult to insure that 'the right mail gets delivered to the right person' and promptly," he said.

Under the binding agreement, letter carriers will receive a retroactive wage increase of 2 percent and wage hikes of 1.4 percent and 1.2 percent, along with six cost-of-living adjustments. The agreement also gives letter carriers a one-time cash payment of as much as $1,000 in the first year of the contract.

In a press release yesterday, the letter carriers union described the arbitration decision as "historic" and a recognition of the "hard work" performed by the postal employees who walk mail routes.

Last year, postal officials and leaders of two other large unions, the American Postal Workers Union and the National Postal Mail Handlers Union, negotiated two-year contracts that the unions said boosted pay between 6 percent and 7 percent.

The contracts were the first negotiated agreements since 1987 and briefly broke the usual pattern of relying on arbitration panels to determine wage increases and working conditions.

But by winning a three-year pact through arbitration, letter carriers no longer will bargain at the same time as the other two large unions. Fleischli said that should not stop the Postal Service "from continuing to pursue its goal of negotiating identical and moderate wage increases with its major unions."