The Case Against Collective Bargaining

Unions are Killing Michigan

 

Introduction

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The failure of collective bargaining is demonstrated by the decline of manufacturing in Michigan, my home state and birthplace of the United Auto Workers.

From April 2006 to May 2010, Michigan led the nation in unemployment. That honor was lost in May when Nevada's rate climbed to 14% and Michigan's dropped to 13.6. That is the best news we’ve had since Toyota’s brake and accelerator problems.

GM and Chrysler are now showing signs of life after bankruptcy and a $85 billion federal bailout (GM alone received $49 billion).

And yes, the unions are to blame. Wages, benefits and work rules cost way too much and put manufacturers at a competitive disadvantage. There is corporate mismanagement, too, but when things get desperate, corporations can change course, make fixes – except when it comes to its union workforce. This is from a November 8, 2008 article by Associated Press auto writer Tom Krisher:

  When GM pushed for changes in 1998, the union went on strike at two key Flint, Mich., parts plants, shutting down the company and costing it about $2 billion in profits.  

Years ago, when there was little competition from foreign manufacturers, high labor costs could be passed on to the customer. Lee Iaccoca says in Iacocca, his 1988 autobiography (page 304):

  As long as Detroit was making money, it was always easy for us to accept union demands and recoup them later in the form of price increases. The alternative was to take a strike and risk ruining the company.  

The following is from the book What Do Unions Do?, published in 1984. It was no anti-union screed. It was written by a couple of Harvard economists who concluded that, over all, unions are beneficial. I'll have more from this book under What Economists Think.

  Unions pushed the union wage premium to extremely high levels from the mid-1970s to the early 1980s, gaining more and more for an increasingly small share of the workforce. We believe that union leaders gave insufficient weight to the job side of the job/wages tradeoff facing them, with dire long-term consequences for the well-being of their membership and the union movement in general . . . It is our hope that union workers and leaders will have learned from the experience that always extracting "more" is harmful in the long run, not only to society as a whole, but to labor itself . . . (Pages 249-250)  

Michigan should be leading the world in auto manufacturing. This is where high-volume production got its start. We have the factories, the infrastructure, the skilled designers and tradesmen, and the support industries. We had a head start, and we blew it.

Gas prices are not the culprit, because this trend started well before June 2008, when the price hit $4 a gallon. SUVs were the big sellers until then. You could say that the automakers should have seen it coming and switched to small, fuel-efficient cars, but they really had no choice. When they lose money on every small car, they can't make it up in volume. They made SUVs and trucks because they were the only vehicles they could sell for a profit. This is from a March 16, 2009 article by Mark Phelan, auto critic for the Detroit Free Press:

  Chevrolet's small and midsize cars labored in obscurity for decades, overlooked by buyers and GM's North American leadership. They earned little or no money compared to big cars and trucks, so GM's North American operations invested more time, money and talent in larger vehicles.  

This is from a September 26, 2006 article in Business Week:

  Because of the high cost of running plants manned by the unionized United Auto Workers, combined with the low profit margins on small cars, U.S. automakers haven't been able to manufacture small cars profitably in the U.S. in decades.  

And this is from a November 8, 2008 article by Associated Press auto writer Tom Krisher:

  At Ford Motor Co. they called it "Blue," a team set up around the year 2000 to design an array of small, fuel-efficient cars to compete with the Japanese. It didn't get far because no one could figure out how to make money on low-priced compacts with Ford's high labor costs.  

It is not a recent phenomenon. This is from the book The Automobile Age, published in 1988 (page 284:

  Detroit’s reluctance to enter the small-car market can be explained by a truism in automobile manufacturing – large cars are far more profitable to build than small cars. Fixed investments in plant and machinery, advertising expenses, and labor costs were about the same for a subcompact and a “standard-size” car, and raw material costs did not vary more than perhaps $500. Yet the standard-size car could be sold for as much as several thousand dollars more than the subcompact. Iacocca, for example, pegs the 1984 profit per unit for the Cadillac Seville at $5,500, versus the usual profit of only about $700 per unit on subcompacts [Iacocca, p  215, 217]. Similarly, dealer’s profit margins averaged 25 percent of the wholesale price for standard-size cars, 21 percent for compacts and intermediates, and only 17 percent for subcompacts. In addition to the consideration that the production of small cars shifted sales away from the far more profitable large cars, the buyers of economy cars were far less likely to order them loaded with luxury extras, which typically were marked up much higher than was the basic car, earning profits of 50 to 100 percent in some instances.  

Production workers at the Big 3 make about $28.50 an hour, which is $59,280 a year – excessive for unskilled labor when, according to the Census Bureau, median household income in the U.S. is $50,233. And the hourly wage is only part of the compensation. When you add the overtime, bonuses and other extras workers were getting before the bankruptcy, average yearly income comes to $73,000. I calculated this figure from a chart obtained in 2008 from the UAW’s own website. It estimated the “performance bonuses” members could expect to receive over the four years of the 2007 contract with GM: 

To get the base amounts from which the bonuses for “assemblers” were calculated for 2008, 2009 and 2010, I divided the bonus by the bonus percentage. For example, the base for 2008 is $2,104 divided by .03. The base for 2007 is my estimate based on the other 3 years and the bonus for 2007 is the contract settlement bonus. Total yearly earnings are calculated by adding the bonus to the base: 

 
  2007 2008 2009 2010
Base $69,700 $70,133 $70,575 $71,067
Bonus $3,000 $2,104 $2,823 $2,132
Total $72,700 $72,237 $73,398 $73,199
 

This does not include fringe benefits, which include generous health insurance and pension. UAW contracts have a "30 and out" provision, which means someone who started at age 18 could retire at age 48. The basic pension is $18,000 a year, with a supplement for the years prior to social security eligibility. This is from the UAW website:

  A typical UAW-represented worker at Chrysler, Ford or General Motors who has reached eligibility for receipt of an 80 percent Social Security benefit receives just over $18,000 per year from his or her employer.

Autoworkers who retire prior to Social Security eligibility are entitled to a supplement which increases annual income from their employer to about $36,000. When retirees reach the age for an 80 percent benefit (age 63) or retire after that, they receive only the basic benefit, and the employer no longer pays the supplement.

  

GM could find all the workers they need for less than half what UAW members are getting. In fact, the 2007 contract allowed GM to hire new employees at $14 an hour so long as they are doing "non-core" work such as material movement, general stores management, finished vehicle driving, chemical management and subassembly.

I don't want to diminish the difficulty of assembly line work, but these jobs don't require a lot of formal education or training. Just about any healthy, moderately-intelligent person could do the job, and there are thousands of unemployed or minimum wage workers who would be happy to take those jobs at $14 an hour. With that kind of reduction in labor costs, the Big 3 could sell small cars at a profit and beat the price of foreign manufacturers on SUVs and trucks. In his final speech to the UAW after eight years as the union's president, UAW president Ron Gettelfinger said that "as a result of the union's sacrifices, the U.S. auto industry is again profitable and gaining U.S. market share . . . GM soon will be the first automaker to assemble a subcompact car in the U.S., a decision made because wages have become more competitive." (Associated Press, 6/15/10) The fact is, however, that UAW wages are competitive with the foreign carmakers in the U.S. only because those companies pay twice the market wage to keep their workers from bringing in the union.

Also contributing to Michigan's slow, painful death are public employee unions. While private sector unions are destroying Michigan's manufacturing base, resulting in increased state costs for unemployment compensation and welfare along with reduced tax revenue, public sector unions are pushing up the cost of teachers and state and local government employees.