Living Economics

Two-tier Wages
Detroit Three's two-tier wage system may be the answer to the cost advantage of transplanted auto makers.

A new VW plant in Chattanooga, TN (a right to work state with weak labor unions) pays its entry-level workers about $27 an hour in wages and benefits. Its Detroit Three competitors are paying their workers about double that amount (WSJ 5/23/2011). With such an uneven playing field, no wonder GM and Chrysler had to accept bailout from the US government to stay out of financial ruin.

But the bailout has strengthened the bargaining power of the Detroit Three. Among other cost-saving measures in health and pension benefits, the UAW has agreed to allow the auto makers to hire entry-level workers at half the hourly pay of longtime workers. At $14 an hour, the wage-benefit package comes to about $30 an hour (BW 9/19/2011).

Ironically, the $14 an hour pay is about the same inflation-adjusted level as the $5 a day pay that Henry Ford used to pay its workers in 1915. Such a reversal would be unthinkable before the bankruptcy of GM and Chrysler and the subsequent government bailout (BW 9/19/2011). Even at this historically low wage rate, there is no shortage of job applicants for the entry-level openings amidst the high current unemployment rate of close to 10%.

Even with this low entry-level wages, the playing field with the foreign transplant auto makers is far from level. To start with, the percentage of entry-level workers is quite low.

Fewer than 3% of GM workers work at the entry-level wage. Even Chrysler has only 14% of its workers at this wage level (BW 9/19/2011). It will take more retirement, buyouts, and capacity expansion to match average per worker wage level of the transplanted non-union auto makers.

Two-tier wages have been tried in the airline industry and others without much success. There is strong union power to eliminate the lower tier as soon as the economy improves. Although the bailout barred the UAW from labor strikes in the first round of contract negotiation, it has left the power of the UAW to engage in "pattern bargaining" unchecked (WSJ 4/29/2009). However, the increasing reliance of profit-sharing rather than wage increases might better align the interests between labor and management. The recent labor contract with GM shows that the UAW is more concerned about jobs than wage equity among its members (NY Times 9/21/2011). Also, as significant shareholders of GM and Chrysler, the UAW is sitting on both sides of the negotiating table.

Wages are, of course, only part of the cost story. Under the deal struck by GM and the United Auto Workers, UAW will take over retiree health obligations via an independent health-care trust with part ownership of company (WSJ Health Blog). As part of the government bailout package, GM and Chrysler were forced to drop unprofitable brands and models and UAW to accept lower health and retirement benefits for entry-level workers. The infamous jobs bank where laid off workers got full pay for doing nothing was suspended (Bloomberg.com).

The fact that GM and Chrysler had to declare bankruptcy to get the labor unions to drop uncompetitive wage and benefit demands signals that collective bargaining may no longer be functional in a globalized labor market. But would GM and Chrysler be better run with the US government and the UAW as part owners?

References:
  • Bloomberg.com 1/28/2009. "UAW to End GM Jobs Bank on Feb. 2, Following Chrysler (Update5)."
  • Business Week. 9/19/2011. "For the UAW, a bargaining dilemma."
  • Business Week. 7/12/2010. "The gulf in auto wages."
  • New York Times. 9/21/2011. "GM deal to hire more at low end."
  • WSJ. 8/5/2011. "The secrets of the GM diet."
  • WSJ. 5/23/2011. "VW chops labor costs in U.S."
  • WSJ. 4/29/2011. "The truth about cars and trucks."
  • WSJ Health Blog. 5/27/2009. Health care trust may own 17.5% of General Motors."
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