The State of America’s Auto Union
With labor contracts between the UAW and Detroit's Big Three--GM, Chrysler, and Ford--set to expire on September 15, poor negotiations between union leaders and auto companies could ultimately affect about 141,000 UAW auto-employees.
The primary area of concern for the upcoming labor contract involves the current two-tier wage system. While entry-level (tier 2) employees are paid $19.28 per hour, legacy (tier 1) employees are paid approximately $28 per hour. This has made it harder to attract new members.
Dennis Williams, president of the UAW, seeks to address this disparity. At a UAW convention in Detroit, Williams said, "we believe in a fair day's work for a fair day's pay, and we believe in equal pay for equal work."
Sadly, this benevolent and straightforward system of worker compensation simply is not practical. To bolster efficiency, large firms typically have a wide variety of workers performing different tasks simultaneously. In economics, this trend is known as "gains from specialization." In order to pay workers in accordance with their job, any division of labor would entail a disparity in wages.
Automakers have proposed a third wage, tier 3, which would be lower than the previous two wage levels. The addition of a third wage would not only provide some flexibility for Detroit's Big Three, but also enable automakers to streamline costs and remain competitive with German and Japanese imports.
With the exception of Volkswagen, foreign carmakers generally avoid dealing with unionized work forces. The lack of union presence has not hindered foreign auto productivity. On the contrary, it has given foreign plants an advantage. Toyota, Honda and Nissan have experienced success by expanding operations into areas that lack union involvement. The Rust Belt, once the epicenter of American industry, has been left to rust due to strong union presence. The recent emergence of the South as a commercial center can be traced to a lack of union organization.
The labor involved in auto production is physically demanding. However, union methodology behind compensation has placed too large of an emphasis on seniority instead of the rigor of the job. Older members that have been placed in less physical lines of work are earning substantially more than entry-level employees performing the same tasks.
Across the country, many have sported shirts that advocate for the elimination of the current wage disparity. Tier 2 employees are seeking tier 1 wages, and tier 1 employees also claim that a pay raise is long overdue.
But what would happen if Detroit's Big Three were able to sustain a wage system that consisted of different salaries for UAW members performing the same job? This would likely hasten the decline in union membership, as unions would become less attractive for younger employees.
In 2009, both GM and Chrysler filed for chapter 11 bankruptcy and received financial bailout packages from the government. Although Ford never filed for bankruptcy, it suffered large corporate losses.
The severe economic downturn forced the UAW to make several concessions with the Detroit Big Three. As entry-level wages were lowered and certain benefits curtailed, American auto corporations could pay union members lower salaries.
The UAW might have to adapt to rapidly changing times, as its own membership has dwindled from roughly 1,500,000 in 1979 to 390,000 in 2014. Since the ratio between active members and retired members is roughly 2 to 3, current workers will likely have a harder time supporting those receiving retirement benefits from the UAW.
The UAW must understand that increasing wages for all employees exacts a toll on American automakers, whose costs are already higher than their Southern competitors. It is no coincidence that the last few years, which saw reduced union demands, witnessed overall corporate growth. If the UAW wants the Big Three to continue to produce in Detroit, the union cannot afford to move backward.
Joseph Mitrani is a contributor for Economics21
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