Without government intervention, one or more of the Big Three
automobile manufacturers--General Motors, Ford, and Chrysler--faces
restructuring in bankruptcy. bankruptcy would not be the end of the
Big Three but a new beginning. Coming out of bankruptcy, the
automakers would start fresh, free of the contractual obligations
that have kept them uncompetitive. The United Auto Workers (UAW)
and Detroit automakers want to avoid bankruptcy and are seeking a
taxpayer bailout. Such a bailout, however, is not an acceptable
alternative to bankruptcy because it would delay the restructuring
the Big Three need to become competitive again.
UAW workers earn $75 an hour in wages and benefits--almost
triple the earnings of the average private sector worker. Detroit
autoworkers have substantially more health, retirement, and paid
time off benefits than most Americans. These benefits, and a jobs
bank that pays UAW workers nearly full wages to not work, have been
a major force driving the Detroit automakers' current fiscal woes.
Consequently, Congress should not force all Americans to pay for
high wages and benefits for UAW workers.
UAW Workers Highly Paid
The Big Three automakers are asking taxpayers to bail out some
of the most highly paid workers in America. Chart 1 shows the
average hourly compensation (wages and benefits) earned by all
private sector workers and for UAW represented workers at the Big
Three. It also shows the hourly compensation at Japanese plants in
the United States.
The average private sector worker earned $25.36 an hour in
2006--$17.91 an hour in cash wages and $7.45 an hour in benefits
such as pensions, paid time off, and health insurance.
Autoworkers at Japanese plants located in the United States earn
substantially more than this: between $42 and $48 an hour in wages
and benefits, which amounts to over $80,000 a year in total
compensation--hardly cheap labor.
The typical UAW worker at the Big Three earned between $71 and
$76 an hour in 2006. This amount is triple the earnings of the
typical worker in the private sector and $25 to $30 an hour more
than American workers at Japanese auto plants. The average
unionized worker at the Big Three earns over $130,000 a year in
wages and benefits.
Most of the Big Three's UAW workers' compensation comes as
benefits, not cash. Table 1 breaks down the average hourly labor
costs for a UAW worker at Chrysler in 2006. Ford and General Motors
have similar compensation profiles.
Only 38 percent of the $75.81 an hour that Chrysler's UAW
workers earned came as base wages. The rest came as benefits
(though some of those benefits, such as overtime premiums and paid
vacation days, are paid in cash). Health care costs are the most
expensive benefit, accounting for over a quarter of total
Gold-Plated Health Care
Health care costs the Big Three so much because the UAW
negotiated gold-plated health benefits that include medical,
hospital, surgical, and prescription drug coverage. These benefits
also cover durable medical equipment (e.g., hearing aids), dental
benefits, and even Lasik eye surgery. For all this, GM workers and
retirees must pay monthly premiums of $10 for an individual and $21
for families. As a result, UAW workers and retirees have
some of the most comprehensive and least expensive health care in
These gold-plated health care benefits put the Big Three, and
especially GM, at a competitive disadvantage. For example, GM has
three times as many retirees as active workers, and health care
costs for both groups cost the company $4.6 billion in 2007. The
UAW's lavish health benefits added $1,200 to the cost of each
vehicle produced in the United States.
The Japanese automakers, by contrast, provide standard health
benefits to their American employees. Consequently, health care for
active workers cost Toyota $215 per vehicle in 2006.
Every American buying an auto made in Detroit pays an extra $700
to $1,000 to support health benefits far more generous than most
UAW employees also receive the following extraordinary
- 30-and-Out contracts. UAW employees work under a
30-and-Out contract that allows them to retire with generous
pension benefits after 30 years on the job, irrespective of
- Seven weeks' vacation. A Chrysler worker with 15 years'
tenure was entitled to 34.5 paid holidays and vacation days in
2006--seven weeks in paid time off. This is three weeks more paid
vacation than the average private sector worker with similar
- Paid not to work. Under UAW contracts, workers whom the
automakers let go when plants close are not laid off. Instead,
after exhausting regular unemployment payments from the automakers
and the government, they are transferred to a jobs bank where they
are paid nearly full wages to not work.
A Step in the Right Direction
These affluent wages and benefits prevent the Detroit automakers
from successfully competing. The Detroit automakers and the UAW
have known about this competitive disadvantage for decades, but the
UAW resisted making any concessions until 2007--when bankruptcy
became an impending reality.
Under the 2007 contract, the Big Three and the UAW agreed to the
- To transfer, starting in 2010, retiree health care obligations
to a Voluntary Employee Benefits Association (VEBA) run by the UAW.
The automakers agreed to collectively pay $60 billion into the
VEBA, after which time the UAW would have full responsibility for
providing retiree health benefits. This agreement takes the cost of
providing health benefits off the Big Three's balance sheets.
- To limit time in the jobs bank to two years.
- To require workers in the jobs bank to accept new employment
- To create a two-tiered wage structure. Detroit automakers may
now hire entry-level workers for "non-core" positions (those not
directly involved in manufacturing automobiles) for roughly $26 an
hour in wages and benefits. Although these entry-level workers may
transfer to the higher paid vehicle assembly jobs as vacancies
occur, they will never receive retiree health benefits.
Too Little, Too Late
GM estimates the new contract will eventually cut 70 percent of
their labor cost gap with the Japanese manufacturers.
Average compensation will fall to $54 an hour once the contract
takes full effect.It will, however, take years for the Big Three to
realize these cost savings. The cost reductions affect only a
minority of workers and occur gradually as current workers
The vast majority of UAW workers in Detroit today still earn $75
an hour, and the Detroit automakers must still find $60 billion to
finance the VEBA. Detroit's labor costs will not fall as much or as
rapidly enough as the Big Three need to restore their competitive
position and remain solvent.
Had the UAW made similar concessions in the early 1990s, it
might have prevented the Big Three from falling into such dire
economic straits. It did not, however, and the new contract is too
little, too late to keep the Detroit automakers solvent.
Taxpayers Should Not Bail Out the
By seeking a bailout, the UAW, along with the Detroit
automakers, are asking taxpayers to help keep UAW earnings at $75
an hour when the typical American takes home a third that much. The
Big Three also want Congress to use taxpayers' money to pay
billions of dollars into the new health care VEBA, thereby funding
health care benefits for UAW retirees that are far more generous
than those provided by an already under-funded Medicare system.
UAW workers understandably want to preserve the standard of
living to which they have become accustomed, but that standard is
not sustainable in a competitive economy. Congress should not tax
all Americans in order to maintain UAW workers' affluent
James Sherk is Bradley
Fellow in Labor Policy in the Center for Data Analysis at The