Tuesday, April 21, 2009

The economics, and politics, of auto workers' wages

The economics, and politics, of auto workers' wages

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The auto industry is in crisis around the world, due to an unprecedented collapse in sales. And governments around the world (from Europe to Asia to the Americas) have moved quickly to keep the industry in business.

Only in North America, however, has this restructuring been sidetracked by an ultimately phony confrontation over auto worker wages. Auto workers are well paid everywhere - after all, that's a key reason governments chase auto investments in the first place. But only in Canada and the United States have governments made auto assistance contingent on union concessions. That's not the case in Germany or Japan (where auto workers make more than they do in Canada), nor in Brazil or Korea (where they make less). Only here has the future of the industry been linked to a frontal attack on unions.

This union-bashing took a dangerous turn last week. Successive business and political leaders stepped up to point a gun at the head of the Canadian Auto Workers union. Fiat's chief executive Sergio Marchionne, Industry Minister Tony Clement and Chrysler chief executive Robert Nardelli all threatened to pull the plug on Chrysler without CAW concessions of up to $19 per hour.

Their argument is dressed up in the language of "competitiveness," "viability," and "realism." But ultimately it's about politics, not economics.

Economically, wage cuts are irrelevant to the future of Chrysler and any other auto maker. Whether these companies live or die depends on bondholders, on government, and - most importantly - on consumers. Direct labour accounts for 7 per cent of total auto costs: less than capital, less than materials, less than dealer margins. Cutting that to 6 per cent won't sell a single car or truck.

Indeed, the demand flies completely in the face of Fiat's own successful restructuring. Fiat went from basket case in 2004 to success story by 2007. Was that because of wage cuts? No ... because there weren't any. Rather, Fiat's turnaround reflected successful efforts to develop new products (like its trendy Cinquecento), to rebuild domestic market share, to boost foreign sales through exports and joint ventures and to implement leaner, dynamic management. That's what we need in North America - not wage cuts, which will only undermine auto sales as other employers follow the lead.

The true economic constraint on wages is that they be validated by productivity, and remain broadly competitive with competing locations. Canadian auto workers meet both tests: productivity (averaging $300,000 value-added per worker per year) is the world's best, far exceeding compensation, and labour costs are below-average among the various suppliers feeding the North American market.

So the attack on auto workers isn't about economics. It's about politics.

How else to explain the arbitrary hook on which Clement and Co. have hung their hats? They're demanding that CAW costs be cut to match non-union plants in Canada. (By the way, accounting for demographics and capacity utilization, the true difference between union and non-union auto plants in Canada is more like $5 per hour, not $19.)

Canadian non-union plants account for just 4 per cent of North American sales. What about the other 96 per cent of the competition? Why not demand that CAW costs be cut to the level of unionized auto workers in Korea, say, or unionized workers in Mexico - both of which pose greater competitive threats than non-union Canadian plants? Because the demand is not about being competitive. It is about challenging the legitimacy and survival of unions. It aims to exploit the wedge, in an anti-union political culture, between workers who've managed to win a little more - and those who have yet to do so.

Finance Minister Jim Flaherty tried a similar stunt last November, in his infamous economic update. He tried to capitalize on fears of recession to snatch away the legal right to strike from federal employees (who also enjoy good wages and pensions). It was an opportunistic, mean-spirited act, driven by politics, not economics. It was defeated by the united opposition parties.

The same government is now trying the same thing with auto workers: capitalizing on economic fear to challenge the fundamental right of unions to exist and to bargain.

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