GM: Gaining the political benefits, and Making you pay

Courtesy of Economist’s View, David Leonhart’s article in the New York Times on the possible UAW bailout. David discusses the high costs of labor paid for by the Detroit 3, and seems to be arguing in general that it’s a good idea for the country to subsidize the lifestyle of Michigan democrats.

The interesting point is near the end, where he says GM is a victim of history in the choices those companies made in supporting the UAW:

Economic Scene – Figure Skews Debate of a Bailout for Detroit – NYTimes.com
The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation. So the number isn’t made up. But it is the combination of three very different categories.

The first category is simply cash payments, which is what many people imagine when they hear the word “compensation.” It includes wages, overtime and vacation pay, and comes to about $40 an hour. (The numbers vary a bit by company and year. That’s why $73 is sometimes $70 or $77.)

The second category is fringe benefits, like health insurance and pensions. These benefits have real value, even if they don’t show up on a weekly paycheck. At the Big Three, the benefits amount to $15 an hour or so.

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour. It’s a little more than twice as much as the typical American worker makes, benefits included. The more relevant comparison, though, is probably to Honda’s or Toyota’s (nonunionized) workers. They make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.

The third category is the cost of benefits for retirees. These are essentially fixed costs that have no relation to how many vehicles the companies make. But they are a real cost, so the companies add them into the mix — dividing those costs by the total hours of the current work force, to get a figure of $15 or so — and end up at roughly $70 an hour.

The crucial point, though, is this $15 isn’t mainly a reflection of how generous the retiree benefits are. It’s a reflection of how many retirees there are. The Big Three built up a huge pool of retirees long before Honda and Toyota opened plants in this country. You’d never know this by looking at the graphic behind Wolf Blitzer on CNN last week, contrasting the “$73/hour” pay of Detroit’s workers with the “up to $48/hour” pay of workers at the Japanese companies.

These retirees make up arguably Detroit’s best case for a bailout. The Big Three and the U.A.W. had the bad luck of helping to create the middle class in a country where individual companies — as opposed to all of society — must shoulder much of the burden of paying for retirement.

Of course, this is absurd. Not every industry was, and is, unionized to the extent that the Detroit 3 are. Not all of them have these level of benefits for retired workers.

Rather, the Big 3 wanted political favors (such as bailouts and protection from competition) and spending future income on future workers seemed like a good trade to them.

GM, Chrysler, and Ford are failing in part because of their foolish attempts to manipulate the government into protecting them from the market.

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