[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