The union dilemma

The auto company bailout plan failed to pass in the Senate, and last-minute negotiations between the Republicans and the United Auto Workers to try and salvage the bill reached an impasse when the UAW refused to agree to a date certain when their members would accept a pay cut bringing their pay in line with the pay of U.S. workers in competing (and profitable) companies like Toyota and Honda. They were offered any day in 2009, but refused to make a date-certain commitment – meaning in effect they refused to accept the pay cut. No doubt the union leaders hope in the end the administration will blink and aid the auto companies without significant union concessions – and in fact they may win this game of chicken in the short run, though they will lose in the long run.

The union dilemma is that on the one hand collective bargaining gives individual workers some much-needed leverage in the eternal competition to divide a company’s profits between shareholders, managers, and the workers. On the other hand, the incentive for union leaders is to gain as much pay and benefits as possible for their membership in the short run, irrespective of the long-term consequences for the company. So now we have domestic auto companies whose labor costs are so high they cannot compete effectively in the market, and are on the verge of bankruptcy. As a consequence, instead of just taking a pay cut, tens of thousands of auto workers may soon be out of a job altogether.

The problems GM and Chrysler and Ford face are not altogether the fault of the unions – the company management has been remarkably inept, and these three companies have been losing market share for years, at least in the U.S. market. Nonetheless, the union demands, backed by occasional strikes, have finally driven the companies over the economic cliff. GM’s average labor costs, including pensions, was about $73.50 per hour, while Toyota’s was about $48 per hour. GM worker health car costs are about $1525 per vehicle, vs $201 per vehicle for Toyota. It is pretty hard for a company to stay in business when its costs are that far out of line with the competition’s costs.

This isn’t the first time this has happened. Union labor costs were one of the primary reasons why the domestic steel companies were driven out of business by foreign competition, leaving us with high rust belt unemployment.

What is needed is some new form of collective bargaining system in which the incentives for the union leadership are aligned with survival of the company, rather than just with short-term gains for the membership. In fact, much the same change is needed for management pay as well in many industries, so that CEO’s aren’t incentivized just to maximize their yearly bonuses.