Friday, November 21, 2008

Labor is not the cause of Detroit's ills - management is

A number of anti-labor Republicans are saying that the problem with the Detroit automotive industry is excessive wages paid to union workers, so the solution is for automotive workers to take heavy pay cuts. Some, like Senator Kyl (R - AZ) are claiming that the problem is that auto workers are getting paid $70 an hour.

Wow! Seventy dollars an hour. That's almost as much as a very low-paid junior executive, isn't it. There's two problems with that number. First, it's a composite of actual wages and benefits, and the benefits don't go to the workers. Second, while there was a problem with the cost of benefits for automotive workers, the Detroit companies renegotiated their contracts in 2007 and those benefit costs have been changed, if the companies can only last until 2010.

Jonathan Cohn explains:
it's not $70 per hour in wages. According to Kristin Dziczek of the Center for Automative Research--who was my primary source for the figures you are about to read--average wages for workers at Chrysler, Ford, and General Motors were just $28 per hour as of 2007. That works out to a little less than $60,000 a year in gross income--hardly outrageous, particularly when you consider the physical demands of automobile assembly work and the skills most workers must acquire over the course of their careers.

More important, and contrary to what you may have heard, the wages aren't that much bigger than what Honda, Toyota, and other foreign manufacturers pay employees in their U.S. factories. While we can't be sure precisely how much those workers make, because the companies don't make the information public, the best estimates suggests the corresponding 2007 figure for these "transplants"--as the foreign-owned factories are known--was somewhere between $20 and $26 per hour, and most likely around $24 or $25. That would put average worker's annual salary at $52,000 a year.
So the real problem is that the Detroit automotive companies promised very high cost health insurance to retirees, only to find that health costs for retirees rose even more rapidly that expected even as the retirees lived longer, and at the same time the automotive industry began downsizing so that current workers each had to provide income to cover the benefits of more retirees. Of that $70 an hour, $42 goes to pay heath benefits for retirees. The foreign auto companies do not have such a large cohort of retirees, since they are newer companies.

This problem can't last. But it won't. It's been recognized and already dealt with.
In 2007, the Big Three signed a breakthrough contract with the United Auto Workers (UAW) designed, once and for all, to eliminate the compensation gap between domestic and foreign automakers in the U.S.

The agreement sought to do so, first, by creating a private trust for financing future retiree benefits--effectively removing that burden from the companies' books. The auto companies agreed to deposit start-up money in the fund; after that, however, it would be up to the unions to manage the money. And it was widely understood that, given the realities of investment returns and health care economics, over time retiree health benefits would likely become less generous.

In addition, management and labor agreed to change health benefits for all workers, active or retired, so that the coverage looked more like the policies most people have today, complete with co-payments and deductibles. The new UAW agreement also changed the salary structure, by creating a two-tiered wage system. Under this new arrangement, the salary scale for newly hired workers would be lower than the salary scale for existing workers.
So not only are the Detroit auto companies unloading the legacy costs of their retirees, they are lowering pay scales for new hires. When all this takes effect, they will be more than financially competitive with the foreign car manufacturers.

But they have to get to where all these changes have taken effect. That's what they need the bridge loan for.

First they need to really tighten their belts on costs, though. Lower executive pay and sell the corporate jets, for example. Get them to fly coach or business class. Publicize executive pay and the costs of benefits instead of hiding it deep inside proxy statements. As part of the publicity, report how much the cost of all the executives getting paid more the $250,000 a year in total pay and benefits cost the company per car sold. Give comparisons across the companies to see which one's executives cost more.

If they are going to take public money as low-cost loans to bridge the companies into their lower-cost futures, then the public has a right to know what they are spending the money on, and since money is fungible, that means they report ALL of their expenses in clearly accountable ways.

Until they pay the money back with interest, they become publicly owned companies, and they get treated as such, especially in executive pay, benefits and travel and in reporting all those things publicly in easy to read numbers that are comparable across companies.

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