Is Big Labor Killing the Big Three?

This debate appeared in the Los Angeles Times on December 4, 2008.
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Today's question: U.S. automakers say the high cost of laborhere gives overseas companies an unfair advantage. How much of aproblem is Big Labor for Detroit? How much of an advantage -- if atall -- do Honda, Toyota and others have over U.S. companies?Previously, Burtless and Ikenson discussed the automakers' restructuring plans and whether U.S.car manufacturers should be allowed to slipinto bankruptcy.


Bad-selling gas guzzlers are the Big Three's majorproblem

Point: Gary Burtless

IThe Big Three U.S. automakers face a cost disadvantage comparedwith some of their overseas and foreign-nameplate competitors thatmanufacture cars in the United States. Part of this disadvantage isbecause of the labor contracts they have negotiated with the UnitedAuto Workers. By contrast, blue-collar workers employed inforeign-nameplate factories in the U.S. are only rarely covered byunion contracts.

The basic hourly wage received by a UAW worker in a Big Threeplant is close to that received by a Toyota or Honda worker in aU.S. plant. The UAW-negotiated wage was roughly $28 an hour in2007. For new workers, the hourly wage was lower; senior workersmade more money. The major cost difference between UAW members andemployees in foreign-nameplate factories in the U.S. comes infringe benefits. The UAW has been one more of the more successfulAmerican unions in fighting for generous pensions and healthbenefits for its members.

It is hard to compare the cost of fringe benefits provided toactive workers, because foreign-nameplate auto manufacturers in theU.S. do not report all their labor costs in a way that makes acomparison easy. We do know, however, that active workers in a BigThree plant are considerably older than their foreign-nameplatecounterparts, meaning the cost of funding their pensions and healthbenefits are higher. Providing health benefits to a 55-year-oldworker can cost as much as three times the money an employer spendson a 25-year-old, even if both workers are covered by an identicalplan.

Because the Big Three have an older workforce, their employeebenefit costs are higher than those of their foreign-nameplatecompetitors. This would be the case even if both foreign anddomestic producers offered the same benefits packages.Historically, however, the UAW has negotiated better benefits forits workers.

Many critics of the auto giants and the UAW claim that theaverage hourly wage in Big Three plants is $70 or more. This is anabsurd overestimate. It would be more accurate to say that thetotal labor costs paid by the Big Three are more than $70 per houractually worked on an assembly line. A large percentage of thetotal labor cost, however, is paid to retired workers and theirdependents, not to active workers. The benefits owed to retireesmust be paid by the automakers, regardless of whether any cars areproduced in their factories. The legacy costs of paying retireesare vastly more expensive for the Big Three than they are for theirforeign-nameplate competitors, whose factories went on line only inthe last 25 years.

The Big Three and UAW were no doubt foolish to negotiatecontracts that saddled the companies with such enormous legacycosts. The companies and the union have tried to lighten the loadby renegotiating health benefits and reducing the companies'required contributions for retiree benefits. Nonetheless, thecompanies are on the hook to pay for much higher retiree costs thanthe ones faced by their foreign-nameplate competitors. Reducingthese legacy costs must certainly be part of any rescue package torestore the Big Three to profitability.

Some critics of the UAW claim that the union boosts Big Threecosts by reducing management flexibility and cutting workerproductivity. In the short run this may be true, but both theautomakers and union have adapted to the competitive environment bybecoming much more flexible.

The more serious problem faced by the Big Three is the shrinkingpopularity of their most profitable vehicles. When big,gas-guzzling vehicles were in vogue, the Big Three made a lot ofmoney. This encouraged workers and managers to form unrealisticexpectations about the affordability of costly union contracts.Gas-guzzlers are no longer in vogue, and labor costs that wereaffordable in more prosperous times may kill the companies now.

Gary Burtless, a senior fellow at the Brookings Institution,served in the Carter administration as a staff economist for theDepartment of Labor and the Department of Health, Education andWelfare.


Cut out organized labor, and GM survives

Counterpoint: Daniel J. Ikenson

Gary,

I agree with your conclusions about the adverse impact ofthe contracts agreed between labor and management over the years.And no doubt management's failure to prepare for the day when bigtrucks and SUVs would fall out of favor is haunting the BigThree.

But something is causing you to hedge on the obvious conclusion(which flows from your own analysis) that the UAW has made the BigThree less flexible and less productive. You say, "In the short runthis may be true, but both the automakers and union have adapted tothe competitive environment by becoming much more flexible." That'slike saying, "The brain damage was caused by banging my head with ahammer, but I'm not banging as hard now." The union has no viablechoice but to show maximum flexibility now -- a willingness todemand nothing. Don't bang on your head at all!

In today's globalized, just-in-time economy, companies need tobe nimble. When the economy slows and demand shrinks, companiesneed to be able to cut back production and costs commensurately --or else they shouldn't expect to survive. That has always beenexceedingly difficult for high-fixed-cost industries, but one ofthe main reasons the Big Three has such high fixed costs is thatcollective bargaining has made labor a fixed cost. Yes, it hasbecome more variable pursuant to the most recent contract, but it'sstill not variable enough. The infamous JobsBank is a perfect example. How can General Motors expect to cutcosts when demand shrinks if it is obligated to pay obsoleteworkers almost their entire salaries for two years to not work?

According to GM's 2008 tax filing, its operating costs in 2007were $179 billion, of which $53 billion were fixed costs. Includedin those fixed costs are "manufacturing labor, pension and otherpost retirement employee benefits (OPEB) costs, engineeringexpenses and marketing related costs." The bulk of those costs isthe product of labor-management negotiations. Assign blame to theparties as you see fit, but without the union in play, labor costscertainly wouldn't be so fixed -- or so high.

Gary, you properly distinguish worker compensation from workersalaries to make the point that current wages between the Big Threeand foreign-nameplate workers isn't that vast. That's true but, Ithink, irrelevant to the analysis. Total compensation is the costof labor to the companies, and for GM it is about $73 per hour and for Toyota about $48. Theaverage cost differential between the Big Three and all the foreignnameplate companies is about $30 per hour. That's huge.

GM is testifying before Congress that it has two choices: to getbailed out and continue operating or go belly up at year's end. Whydoes it have to be all or nothing? GM needs to cut about $2.5billion of operating costs from its budget per month to stop thebleeding (under a scenario of no change in revenues). It might beable to do that if it had the flexibility to close plants, fireworkers, cut salaries and reduce pensions and healthcare benefits.But thanks to the union contract, it doesn't have thatflexibility.

Foreign-nameplate producers account for half of auto productionand sales in the United States. A quarter-century of competitionbetween the Big Three producers and the foreign nameplates hasallowed a comparison of two models of production. I think there'splenty of evidence to conclude that the firms that don't useorganized labor are better suited to survive the current downturnin demand. Perhaps it has something to do with better management ora more efficient culture, but the fact remains that the half of theU.S. auto industry whose workers are not organized (theforeign-nameplate producers) are in much better fiscal shape thanthe Big Three.

Daniel J. Ikensonis associate director of the Cato Institute's Center for TradePolicy Studies.