Is Big Labor Killing the Big Three Automakers?

Gary Burtless and Daniel J. Ikenson debate bailing out the Big Three. Today’s question: U.S. automakers say the high cost of labor here gives overseas companies an unfair advantage. How much of a problem is Big Labor for Detroit? How much of an advantage – if at all – 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 slip into bankruptcy.

Point : Gary Burtless

The Big Three U.S. automakers face a cost disadvantage compared with some of their overseas and foreign-nameplate competitors that manufacture cars in the United States. Part of this disadvantage is because of the labor contracts they have negotiated with the United Auto Workers. By contrast, blue-collar workers employed in foreign-nameplate factories in the U.S. are only rarely covered by union contracts.

The basic hourly wage received by a UAW worker in a Big Three plant is close to that received by a Toyota or Honda worker in a U.S. plant. The UAW-negotiated wage was roughly $28 an hour in 2007. For new workers, the hourly wage was lower; senior workers made more money. The major cost difference between UAW members and employees in foreign-nameplate factories in the U.S. comes in fringe benefits. The UAW has been one more of the more successful American unions in fighting for generous pensions and health benefits for its members.

It is hard to compare the cost of fringe benefits provided to active workers, because foreign-nameplate auto manufacturers in the U.S. do not report all their labor costs in a way that makes a comparison easy. We do know, however, that active workers in a Big Three plant are considerably older than their foreign-nameplate counterparts, meaning the cost of funding their pensions and health benefits are higher. Providing health benefits to a 55-year-old worker can cost as much as three times the money an employer spends on a 25-year-old, even if both workers are covered by an identical plan.

Because the Big Three have an older workforce, their employee benefit costs are higher than those of their foreign-nameplate competitors. This would be the case even if both foreign and domestic producers offered the same benefits packages. Historically, however, the UAW has negotiated better benefits for its workers.

Many critics of the auto giants and the UAW claim that the average hourly wage in Big Three plants is $70 or more. This is an absurd overestimate. It would be more accurate to say that the total labor costs paid by the Big Three are more than $70 per hour actually worked on an assembly line. A large percentage of the total labor cost, however, is paid to retired workers and their dependents, not to active workers. The benefits owed to retirees must be paid by the automakers, regardless of whether any cars are produced in their factories. The legacy costs of paying retirees are vastly more expensive for the Big Three than they are for their foreign-nameplate competitors, whose factories went on line only in the last 25 years.

The Big Three and UAW were no doubt foolish to negotiate contracts that saddled the companies with such enormous legacy costs. The companies and the union have tried to lighten the load by renegotiating health benefits and reducing the companies’ required contributions for retiree benefits. Nonetheless, the companies are on the hook to pay for much higher retiree costs than the ones faced by their foreign-nameplate competitors. Reducing these legacy costs must certainly be part of any rescue package to restore the Big Three to profitability.

Some critics of the UAW claim that the union boosts Big Three costs by reducing management flexibility and cutting worker productivity. In the short run this may be true, but both the automakers and union have adapted to the competitive environment by becoming much more flexible.

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

Visit the Los Angeles Times for the Counterpoint to Gary Burtless’s Statement »