(by Pete Winn, CNSNews.com) – Economists in Michigan, the long-time home of the auto industry, say they don’t support the proposed multi-billion dollar bailout of Big Three automakers Chrysler, GM and Ford.
One reason why, they say, is the ultra-high labor costs for union workers employed by the Big Three. It costs over $73 per hour on average to employ a union auto worker, according to University of Michigan at Flint economist Mark J. Perry.
“Is it right to tax the average worker making $28.50 to bailout workers whose labor cost is over $73 an hour?” Perry asked.
He explained that in 2006, widely available industry and Labor Department statistics placed the average labor cost for UAW-represented workers at the former DaimlerChrysler at $75.86 per hour. For Ford it was $70.51, he said, and for General Motors it was $73.26.
“That includes the hourly pay, plus the benefits they’re receiving and all the other costs to General Motors, Ford and Chrysler, including legacy costs – retirement costs, pensions, and so on – so it’s looking at the total labor costs per hour worked for workers,” Perry said.
For U.S. workers at Toyota, however, the per hour labor cost is around $47.60, around $43 for Honda and around $42 for Nissan, Perry added, for an average of around $44.
“So we’re looking at somewhere around a $29 per hour pay gap between the Big Three and the foreign transplants that are producing cars in the United States,” Perry, chairman of the economics department, told CNSNews.com.
The average union worker at Chrysler, meanwhile, received 150 percent more in compensation than U.S. [manufacturing] workers generally.
“Using Bureau of Labor Statistics numbers, the average compensation for manufacturing workers is around $31.50, and the average hourly compensation, including benefits, for the average worker in the U.S. economy is around $28.50,” Perry told CNSNews.com.
If you annualize Chrysler’s labor cost of $75.86 an hour per worker over a 35-hour week, for 50-weeks a year, the yearly compensation comes in at almost $133,000 per worker per year.
“That’s the cost to Chrysler of those workers,” Perry added. “That’s not necessarily what the worker would receive in a paycheck.”
Perry, meanwhile, said he is not personally in favor of a bailout.
“The question is, where do you stop? Would this just be a downpayment on a continuing bailout that they would need in the future?” he asked.
“Once we’re in for $25 billion, or $50 billion, it’s going to be a lot easier for them to ask for more money later,” he added.
The alternative to a bailout, Perry said, would be bankruptcy.
“We have a bankruptcy law to protect companies that need to go through reorganization for protection from their creditors,” Perry said.
Perry noted that proponents of a bailout cite a study that shows that one job out of every 10 jobs in the U.S. economy is tied to the auto industry.
“If we want this industry to be competitive and survive for the next decade or more, they really have to get their labor costs in line with reality and the global marketplace,” he said.
“Maybe it is time for the production to shift towards companies that have lower labor costs; that are more efficient and more productive. Even if that wasn’t production that took place in Michigan by United Auto Workers, it would still be production that would take place somewhere in the U.S. economy. So we would still have a large number of jobs tied to the auto industry.”
Hart C. Posen, a business school professor at the University of Michigan at Ann Arbor, said there are many economists who still question the 1979 bailout of Chrysler – and whether it was the right thing to do for the auto industry. He is one of them.
“There is no evidence that, in the long run, having bailed out Chrysler we’ve done anything good for the Michigan economy,” Posen told CNSNews.com
“My sense is that even with the bailout, one or more of those firms will disappear anyway,” he added. “There is significant overcapacity in the American automobile industry, and it is typically inevitable when there is significant overcapacity that some of it gets eliminated.”
A bailout directly to automakers will only delay the inevitable, Posen said.
“Historically, one of the strengths of the U.S. economy has been its willingness to let inefficient firms fail and redeploy those resources – money, but also people – to new and potentially more successful businesses. I think that has always been one of the distinctive strengths of the U.S. economy.”
Michael LaFaive at the Mackinac Center for Public Policy, a free-market foundation in Midland, Mich., said all bailouts are bad policy – at least from an economic standpoint.
“They encourage what should be discouraged – basically commerce becoming supplicants of the federal government – or some other level of government. They discourage prudent decision-making on the part of business management and entrepreneurs. After all, if there is someone else there to pick up your mess, why be careful?”
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1. How much does it cost per hour to employ a union auto worker at one of the Big Three (Chrysler, GM and Ford)?
2. Define compensation, benefits and legacy costs (para. 5) as used in this article.
3. What is included in the cost per hour to employ a Big Three auto worker?
4. How does the per hour labor cost for U.S. workers at the Japanese auto companies Toyota, Honda and Nissan compare with the Big Three?
5. How much more compensation does the average union worker at Chrysler make than U.S. manufacturing workers in general?
6. Why doesn’t University of Michigan economist Mark Perry support a bailout for the Big Three?
7. a) Why does University of Michigan business professor Hart Posen question whether the 1979 bailout of Chrysler was the right thing to do?
b) Ask a parent or grandparent if he/she supported the 1979 bailout of Chrysler – why or why not?
8. Most people would agree that employees should try to get the highest compensation and benefits they can. The professors quoted for this article believe that the labor costs for union workers employed by the Big Three are too high. What do you think about their reasoning? Explain your answer.
THE UAW (from wikipedia and the UAW website):
Visit the UAW website.
Read an article about previous problems at the Big Three automakers at the Detroit News website.