The GM-UAW Settlement: Too Little Too Late?

Last week, the United Auto Workers union (UAW) called its first strike against General Motors (GM) in thirty-seven years. The strike was over in two days when negotiators approved a new contract between the two parties. The settlement avoids a costly shutdown of GM’s U.S.-based plants; however, it didn’t solve the basic problem, which is GM’s ongoing loss of market share in the United States and its lack of profitability and competitiveness in its home market.

The problem isn’t that GM has forgotten how to make cars profitably. GM is profitable in Europe and in Asia. In fact, GM is the most successful foreign automobile manufacturer in the growth market of the future, China. Nor is the problem that the United States is no longer a country where automobile manufacturing is no longer economically viable. Toyota, Honda, Nissan, et al., are building cars in the States and earning profits here. The crux of GM’s difficulties here in the States is that its hourly labor costs (wages, health care, pensions, insurance, etc.) total about $73 per hour, whereas the comparable costs for the Japanese-owned manufacturers is in the $45-$50 per hour range.

Americans building cars for the Japanese companies are paid less than GM’s workers because they are not unionized.According to union ideology, those nonunionized workers are shamefully exploited. Nonsense! There are over 340,000 Americans glad to be assembling cars for $45-$50 per hour for the Japanese companies, and millions more would love to have those jobs. This indicates that the nonunionized workers are earning closer to the natural, free-market price for that class of labor. The UAW, by contrast, has been able to use its legal privilege as the monopoly supplier of labor for GM to extract wage-and-benefit packages significantly above the market price. As any Economics 101 student could explain, when the price of anything is artificially set above the market-clearing price, there will be a surplus—“unemployed workers,” in the case of labor.

Early estimates are that last week’s settlement may cut the disparity in per-hour labor costs between GM and the Japanese-owned domestic competition by 40-50 percent. That will improve GM’s competitiveness to some degree. Still, it does nothing to address the superior productivity of labor that the Japanese-owned manufacturers have achieved. They build cars using somewhere in the range of 17 to 22 hours of labor, while U.S. manufacturers require somewhere between 26 and 31 hours of labor. GM remains at a formidable disadvantage in its overall cost of labor.

The primary goal of GM’s UAW members in the just-concluded contract talks was “job security.” Pardon me for saying so, but isn’t it about time? GM has been losing market share, closing plants, and shedding workers for several decades. As recently as 1994, GM employed 246,000 UAW hourly workers. Today, a mere thirteen years later, that number has fallen by more than two-thirds to 73,454. The union obviously has done a horrendous job of preserving the jobs of its members. Instead, they stubbornly persisted in using their legal monopoly status to extract ever-higher wage-and-benefit packages from GM. With the union seniority system being what it is, the majority of UAW workers with seniority kept pricing their labor further and further above the market price, happily receiving their gold-plated compensation package while their junior co-workers were laid off as a result. So much for the myth of “labor solidarity.” It would be more accurate to describe the UAW’s behavior as economic cannibalism.

I think the only reason the UAW was prepared to make concessions to GM this year was that the remaining 73,454 workers started looking around and wondering if they were going to be the GM equivalent of “the last of the Mohicans.” Faced with liabilities in excess of $100 billion to pay for the health care of 412,000 retired and active UAW members and their families, GM was teetering on the edge of bankruptcy. The recent settlement caps GM’s share of those costs at $30-$35 billion (for now). The good news is that GM may save $70 billion in expenses. The bad news is that they still have a $30-billion-plus health care burden that their Japanese-owned competitors in the States don’t have.

The bottom line is that even after the settlement, GM’s cost structure will still be considerably higher than that of the foreign-owned automobile manufacturers in this country. If the UAW doesn’t want to force the remaining GM plants in the United States to shut down, and thereby commit economic suicide, they ought to consider reducing their compensation to match what their competition earns. A little simple math shows that it is better to work 48 weeks per year at $45 per hour than zero weeks per year at $70 per hour.