Dollars and Jens
Wednesday, December 10, 2008
Big 3 labor costs
Some of the blogs I read were recently going back and forth on a figure of $73 per hour in compensation for the average Big 3 automaker, which people ultimately agreed was not actually an honest accounting of what it claimed to be measuring, but included benefits for retirees prorated over hours worked by workers. What that back-and-forth never produced was a breakdown of the actual labor costs of the big 3, which this NYTimes column does provide.
Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour. It’s a little more than twice as much as the typical American worker makes, benefits included. The more relevant comparison, though, is probably to Honda’s or Toyota’s (nonunionized) workers. They make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.
I'm always a bit suspicious of pension accounting, and this number should include a measure of pension benefits being earned now by current employees, though it should not include current payments on previously incurred obligations — but the indication is that this column is at least trying to get those numbers right, and includes pension charges in the $55. Including the other $15 or $18 or however much one adds in for current retirees is like taking the interest on debt the company has outstanding and dividing that by hours worked and throwing that on as well; the company's previously incurred debt and current expenses are completely separate. If an automaker were to shrink its operations, that denominator would go down, but the numerator remains fixed; the actual savings would be along the lines of the $55 per hour, and the fixed expenses would simply loom all the larger relative to the ongoing size of the company.

He goes on to indicate that that $10 per hour difference is worth about $800 a car, and writes
[L]abor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say.
This buttresses his assertion that the Big 3's bigger problem than labor costs is that people don't want to buy their cars. I would note that retirement benefits and debt service are a problem for them of comparable size; if you gave them $2500 per car, they could probably meet these costs.

The statistics are very useful, and it's nice to see them published, but there's a lot of shoddy economic analysis in the article as well, and I want to warn you off of that. (Page 1 has an odd assertion that "[t]he Big Three and the U.A.W. had the bad luck of helping to create the middle class", somehow as though it were required not only that the automakers take on the retirement planning services of their employees, but that they fail to fund them. He refers on page 2 to the cost of "keeping jobs" versus "creating jobs", which should be a red flag that someone doesn't know what he's talking about.) I'd also like to note that, in bankruptcy, other items in the cost structure — notably overly expansive dealership networks — could also be reined in; even without getting people to pay more for their cars, he has me thinking they might be viable if they went through bankruptcy, stripped down the fixed costs, pared the dealership networks, and reduced labor costs to those of their competitors. And, perhaps, if Ford and Chrysler merged and both remaining companies scaled back their operations to the ones that are most profitable. This is one of the biggest impediments the fixed costs create: if you scale back to where you maximize your ongoing profit, it will obviously not be enough to meet old obligations, so the companies stay too large, hoping that a bit of luck will enable them to survive, and exacerbating the losses when it doesn't.

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