The Wages of Sin, GM-style

As Congress considers throwing your money at General Motors, a fact oft mentioned in bailout or bankruptcy discussions is that labor costs GM something more than $70 per hour. The relevant idea beneath the talk is that labor is too expensive compared to GM’s competitors. A less-relevant idea beneath repeating the talking point is that autoworkers make too much compared to labor in other industries.

Comparing between industries is less relevant because it is harder to do. The skills required by an “average worker” cost that worker more, or less, to acquire. The final value of the end product matters. Subsidy and regulatory schemes are different across the manufacturing sector. Geographic concentrations of any particular industry magnify the influence of local government policies. The cost of inputs other than labor influence the preference for labor; energy and technology can both substitute for (replace) human effort. To make a useful comparison of wages between industries requires a greater attention to detail than I hear being discussed in Congress, among the pundits, or by the common man.

When I hear someone say autoworkers make too much, I am usually hearing class envy or anti-unionism. Even when I hear myself say such things. But keeping those factors aside and focusing on the more relevant question, do GM workers get too much compared to other autoworkers?

To make a fair answer, its important to be sure the question is understood. How much do GM workers earn? Is it really $70+/hr?

Well, no. In the informal process of discussing it, I have swithched terms and changed the meaning of the question. The $70 figure was stated as GM’s cost of labor. It is easy to understand—and I hope I’ve demonstrated—how cost of labor becomes worker earnings, at least in perception. But they’re not the same thing.

Here’s Felix Salmon:

The average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM's total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers.

Now things unseen are more visible. GM does have a huge labor cost, but not so much because its current workers are overpaid. (Maybe they are, but that’s for another time.) GM’s labor cost is huge because it is still paying for past labor, as pensions and lifetime benefits. Stuff like that can be called “legacy costs”.

Foreign-badged competitors, like Toyota or Hyundai, do not have the same legacy costs. They don’t have to pay for promises made to yesterday’s workers, promises made when orgainzed labor had more power and when competition was weaker. Maybe GM had to make big promises. Maybe they could have afforded them, at the time.

Which raises a new question. Why didn’t GM fully account for, and fully fund, the costs of lifetime pensions and benefits when those costs were incurred? Why not salt away yesterday’s money to cover yesterday’s promises? Small companies have to buy pension contracts (annuities) from third-party benefit providers, forcing them to pay all labor costs out of current earnings. GM, being huge, was not forced into the same discipline. What should have been held in reserve to cover promises was divided between labor and shareholders.

Labor, in a sense, took some of their pension nest-egg in the form of higher wages. Shareholders took the rest as dividends. The union negotiators got to look good, because they delivered both wage rises and the promise of future security. Management looked good for securing labor contracts which meant no interruptions to the dividend stream. For that, I expect management got paid well, but not at such a scale that executive bonuses would have had a material impact on today’s operations.

What I see is not a sudden or short-term problem. GM is where it is because of decisions made decades ago. There’s no way to make the bad actors pay for their mistakes. Sudden or short-term solutions, like bailout “bridge loans” are unlikely to offer any lasting solution. The only way out is to make the GM’s capital—in factories, supply networks, and in trained labor—produce more value.

So, we’re on to another question: How can GM produce more value? And a corollary: Who is best-suited to manage the necessary growth?

Produce more value by making better cars. Better in the sense that people want them. Not in the sense that a lobbyist or legislator thinks they’re better by some other policy measure. The consumer must decide. And who is good at recognizing and meeting consumer demand? I’m sure it isn’t GM’s recent management, and government is in the midst of hiding the same unfunded-liability problem (Social Security) that makes GM’s labor cost so high.

Imposed solutions really just shift costs. But, that’s what is likely to happen. Folks think somebody needs to do something, and soon! Somebody has to pay, preferably somebody else. Wouldn’t it be wonderful if there was a voluntary path through the set of problems facing GM? Imagine an invisible hand pointing the way.