October 3, 2007

October 3, 2007 | Commentary on Jobs, Jobs and Labor Policy

Towing unions into the future

Financial realities have dragged the United Auto Workers (UAW) kicking and screaming into the 21st century. Or, at least, out of the 1970s. Two days after it called its first general strike in more than 30 years, the UAW agreed to a contract with General Motors that doesn't exactly bow to the realities of a competitive economy, but at least nods in the general direction.

The UAW explained that the strike was about job security. UAW members want to keep every single current job here in the United States. Unfortunately, they're demanding the impossible.

The Big Three -- GM, Ford and Chrysler -- pay their unionized work force very well. Many UAW members have only a high school diploma, but they earn an average of $73 an hour in wages and benefits.

Previous contracts provided "job security" by creating job banks. These weren't places workers could go to seek employment. Instead, the carmakers paid full wages for workers who did absolutely nothing. Other contracts also provided stringent job classifications, gold-plated health benefits and generous retirement packages.

The high cost of maintaining labor peace puts the Big Three at a disadvantage when compared with their foreign rivals. Health care, for example, adds $1,600 to the price of every vehicle GM produces, versus a few hundred for American-made Japanese cars. Contract issues such as work rules and paying employees to not work add another thousand dollars.

In decades past, the Big Three were able to pay those wages and pass those costs on to consumers, because Americans had fewer options than they do today. The Big Three no longer sells a majority of the automobiles bought in the United States. Toyota is now the world's largest car manufacturer.

Japanese car companies provide their employees with good jobs at good wages. The typical hourly employee at a Toyota, Honda or Nissan plant in America makes almost $100,000 a year in wages and benefits, before overtime. Those wages seem more than fair, and they're set in a far more open market than the UAW would want to see.

In fact, competition, not corporate greed, is the real problem facing labor unions. When unions negotiate raises for their members, companies pass those higher costs on to consumers. But companies can only pass those costs on if they do not have significant competition. For a long time, that was the case in America. Until the mid-1970s, regulations and trade barriers helped protect the union monopoly.

Those days are gone with polyester and disco. Deregulation and free trade allow Americans to choose from whom they will buy. And Americans choose value for their money. Nonunion companies now dominate the auto, steel, trucking and construction industries -- former union strongholds -- because they offer consumers better value.

This is good for Americans. Cars are much less expensive (after inflation), safer and last longer than they did when the Big Three had a monopoly on the American market. Why should a single mother trying to support her children pay several thousand dollars more to buy a car so that union members can get paid to fill out crossword puzzles in a job bank?

That money could go toward paying for rent, child care or groceries. Competition makes life more challenging for both companies and their employees, but ultimately benefits every American who buys from that company.

The new contract between GM and the UAW gingerly acknowledges this new competitive reality. The contract allows GM to transfer its crushing retiree health obligations to the union, in exchange for a multibillion-dollar lump sum payment to invest to provide for those future benefits.

The deal also creates a new two-tiered wage structure paying newly hired workers more competitive wages than what current workers earn. The new deal will also make it more difficult for workers to sit, not working, in the job banks while still collecting full benefits.

General Motors is trying to rectify its previous mistakes and compete in the modern economy. Time will show if this new contract is enough to turn GM around, or if it is too little, too late.

The future is competition, and businesses and unions must adapt to this new reality. Companies cannot guarantee their workers gold-plated benefits and complete job security when consumers have the choice to buy elsewhere.

James Sherk is the Bradley Fellow in labor policy.

About the Author

James Sherk Research Fellow, Labor Economics
Center for Data Analysis

First appeared in The Examiner Newspaper