Friday, November 28, 2008

Posted by Neil H. Buchanan

Much of the discussion about a possible rescue of the Big Three automakers has been colored by the claim that blue collar workers at those companies earn $70/hour. The original (or, at least, the most prominent) source of this claim seems to have been a recent column in The New York Times by Andrew Ross Sorkin: "At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs."

If this claim were true, it would mean that a 40-hour-per-week, 50-week-per-year worker earns $140,000 in annual gross income. In a column in The New Republic, Jonathan Cohn asks rhetorically: "Is it any wonder the Big Three are in trouble? And with auto workers making so much, why should taxpayers--many of whom make far less--finance a plan to bail them out?" Cohn quickly answers his own question: "Well, here's one reason: The figure is wildly misleading." He shows that GM's workers earned $28/hour in wages in 2007, plus about $10 in benefits. He continues:

But then what's the source of that $70 hourly figure? It didn't come out of thin air. Analysts came up with it by including the cost of all employer-provided benefits--namely, health insurance and pensions--and then dividing by the number of workers. The result, they found, was that benefits for Big Three cost about $42 per hour, per employee. Add that to the wages--again, $28 per hour--and you get the $70 figure. Voila.



Except ... notice something weird about this calculation? It's not as if each active worker is getting health benefits and pensions worth $42 per hour. That would come to nearly twice his or her wages. (Talk about gold-plated coverage!) Instead, each active worker is getting benefits equal only to a fraction of that--probably around $10 per hour, according to estimates from the International Motor Vehicle Program. The number only gets to $70 an hour if you include the cost of benefits for retirees--in other words, the cost of benefits for other people. One of the few people to grasp this was Portfolio.com's Felix Salmon. As he noted friday, the claim that workers are getting $70 an hour in compensation is just "not true."





Cohn concludes his article as follows:

If carried out as planned, by 2010--the final year of this existing contract--total compensation for the average UAW worker would actually be less than total compensation for the average non-unionized worker at a transplant factory. The only problem is that it will be several years before these gains show up on the bottom line--years the industry probably won't have if it doesn't get financial assistance from the government.



Make no mistake: The argument over a proposed rescue package is complicated, in no small part because over the years both management and labor made some truly awful decisions while postponing the inevitable reckoning with economic reality. And even if the government does provide money, it's a tough call whether restructuring should proceed with or without a formal bankruptcy filing. Either way, yet more downsizing is inevitable.



But the next time you hear somebody say the unions have to make serious salary and benefit concessions, keep in mind that they already have--enough to keep the companies competitive, if only they can survive this crisis.





Personally, I take great interest in the auto industry. I grew up in Toledo, Ohio, one of the many small cities that rises and falls with Detroit's fortunes. The best policy response to the current crisis is, as Cohn says, a tough call. As tax professors know better than most, however, getting the right answers is impossible if you are working with the wrong numbers (or if you don't understand the numbers you're working with).

https://taxprof.typepad.com/taxprof_blog/2008/11/auto-workers-70hour-38hour-or-28hour.html