[lbo-talk] Leonhardt parses the unionized automaker pay differential

Michael Pollak mpollak at panix.com
Fri Dec 12 20:03:34 PST 2008


[Long story short: it's 10 bucks an hour that is mostly in benefits rather than pay. And if totally remedied would lower the price of a car 800 bucks -- when the big three is already underpricing the competition for similar models by $2,500.]

http://www.nytimes.com/2008/12/10/business/economy/10leonhardt.html

The New York Times

December 10, 2008

Economic Scene

$73 an Hour: Adding It Up

By DAVID LEONHARDT

Seventy-three dollars an hour.

That figure -- repeated on television and in newspapers as the

average pay of a Big Three autoworker -- has become a big symbol in

the fight over what should happen to Detroit. To critics, it is a

neat encapsulation of everything that's wrong with bloated car

companies and their entitled workers.

To the Big Three's defenders, meanwhile, the number has become proof

positive that autoworkers are being unfairly blamed for Detroit's

decline. "We've heard this garbage about 73 bucks an hour," Senator

Bob Casey, a Pennsylvania Democrat, said last week. "It's a total

lie. I think some people have perpetrated that deliberately, in a

calculated way, to mislead the American people about what we're

doing here."

So what is the reality behind the number? Detroit's defenders are

right that the number is basically wrong. Big Three workers aren't

making anything close to $73 an hour (which would translate to about

$150,000 a year).

But the defenders are not right to suggest, as many have, that

Detroit has solved its wage problem. General Motors, Ford and

Chrysler workers make significantly more than their counterparts at

Toyota, Honda and Nissan plants in this country. Last year's

concessions by the United Automobile Workers, which mostly apply to

new workers, will not change that anytime soon.

And yet the main problem facing Detroit, overwhelmingly, is not the

pay gap. That's unfortunate because fixing the pay gap would be

fairly straightforward.

The real problem is that many people don't want to buy the cars that

Detroit makes. Fixing this problem won't be nearly so easy.

The success of any bailout is probably going to come down to

Washington's willingness to acknowledge as much.

Let's start with the numbers. The $73-an-hour figure comes from the

car companies themselves. As part of their public relations strategy

during labor negotiations, the companies put out various charts and

reports explaining what they paid their workers. Wall Street

analysts have done similar calculations.

The calculations show, accurately enough, that for every hour a

unionized worker puts in, one of the Big Three really does spend

about $73 on compensation. So the number isn't made up. But it is

the combination of three very different categories.

The first category is simply cash payments, which is what many

people imagine when they hear the word "compensation." It includes

wages, overtime and vacation pay, and comes to about $40 an hour.

(The numbers vary a bit by company and year. That's why $73 is

sometimes $70 or $77.)

The second category is fringe benefits, like health insurance and

pensions. These benefits have real value, even if they don't show up

on a weekly paycheck. At the Big Three, the benefits amount to $15

an hour or so.

Add the two together, and you get the true hourly compensation of

Detroit's unionized work force: roughly $55 an hour. It's a little

more than twice as much as the typical American worker makes,

benefits included. The more relevant comparison, though, is probably

to Honda's or Toyota's (nonunionized) workers. They make in the

neighborhood of $45 an hour, and most of the gap stems from their

less generous benefits.

The third category is the cost of benefits for retirees. These are

essentially fixed costs that have no relation to how many vehicles

the companies make. But they are a real cost, so the companies add

them into the mix -- dividing those costs by the total hours of the

current work force, to get a figure of $15 or so -- and end up at

roughly $70 an hour.

The crucial point, though, is this $15 isn't mainly a reflection of

how generous the retiree benefits are. It's a reflection of how many

retirees there are. The Big Three built up a huge pool of retirees

long before Honda and Toyota opened plants in this country. You'd

never know this by looking at the graphic behind Wolf Blitzer on CNN

last week, contrasting the "$73/hour" pay of Detroit's workers with

the "up to $48/hour" pay of workers at the Japanese companies.

These retirees make up arguably Detroit's best case for a bailout.

The Big Three and the U.A.W. had the bad luck of helping to create

the middle class in a country where individual companies -- as

opposed to all of society -- must shoulder much of the burden of

paying for retirement.

So here's a little experiment. Imagine that a Congressional bailout

effectively pays for $10 an hour of the retiree benefits. That's

roughly the gap between the Big Three's retiree costs and those of

the Japanese-owned plants in this country. Imagine, also, that the

U.A.W. agrees to reduce pay and benefits for current workers to $45

an hour -- the same as at Honda and Toyota.

Do you know how much that would reduce the cost of producing a Big

Three vehicle? Only about $800.

That's because labor costs, for all the attention they have been

receiving, make up only about 10 percent of the cost of making a

vehicle. An extra $800 per vehicle would certainly help Detroit, but

the Big Three already often sell their cars for about $2,500 less

than equivalent cars from Japanese companies, analysts at the

International Motor Vehicle Program say. Even so, many Americans no

longer want to own the cars being made by General Motors, Ford and

Chrysler.

My own family's story isn't especially unusual. For decades, my

grandparents bought American and only American. In their apartment,

they still have a framed photo of the 1933 Oldsmobile that my

grandfather's family drove when he was a teenager. In the photo, his

father stands proudly on the car's running board.

By the 1970s, though, my grandfather became so sick of the problems

with his American cars that he vowed never to buy another one. He

hasn't.

Detroit's defenders, from top executives on down, insist that they

have finally learned their lesson. They say a comeback is just

around the corner. But they said the same thing at the start of this

decade -- and the start of the last one and the one before that. All

the while, their market share has kept on falling.

There is good reason to keep G.M. and Chrysler from collapsing in

2009. (Ford is in slightly better shape.) The economy is in the

worst recession in a generation. You can think of the Detroit

bailout as a relatively cost-effective form of stimulus. It's often

cheaper to keep workers in their jobs than to create new jobs.

But Congress and the Obama administration shouldn't fool themselves

into thinking that they can preserve the Big Three in anything like

their current form. Very soon, they need to shrink to a size that

reflects the American public's collective judgment about the quality

of their products.

It's a sad story, in many ways. But it can't really be undone at

this point. If we had wanted to preserve the Big Three, we would

have bought more of their cars.

E-mail: leonhardt at nytimes.com



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