Insightful article by Megan McArdle, business and economics editor for The Atlantic …
Punch line: Both the auto companies and the UAW took the most obvious course at any given time, while not realizing that their cumulative decisions were entirely toxic. They created a non-competitive cost structure that lured foreign competition that wasn’t burdened by high labor costs/
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The Atlantic, New GM, Same Old Union?, Oct 5 2010
In the mid-1950s the Big Three had settled into a relatively stable relationship with the UAW.
When contract time came around, the UAW picked off the company it perceived as the least able to survive a strike; used the threat of a strike to get a good contract; and then demanded the same from the other two.
Management bought union peace with concessions that seemed cheap at the time: tax-favored pension and health care benefits.
Those companies were now in a bad position, because if they risked a strike, their competitor, who already had a contract, would take all their customers.
This relationship essentially meant that the Big Three simply didn’t compete on labor cost, work processes, or any of the other labor-side innovations that have enhanced productivity over the last forty years.
This was good for the UAW and good for the auto manufacturers, because arguably it actually helped cement their cosy oligopoly by removing one of the major competitive pressures.
In hindsight, this was stupid for many reasons.
- Automation made it possible to produce more cars with fewer workers.
- Foreign competition cut into market share — the Big Three had about 90% of the US market at the end of World War II, versus about 45% today.
- Workers started living a lot longer than they were expected to. Now, GM has a little over 50,000 hourly employees–and about a half a million retirees.
- Soaring health care costs made the health care benefits even more of a problem than the pensions.
Had there been no foreign competition, this wouldn’t have mattered so much.
Unfortunately for the Big Three, there was competition, from foreign automakers who didn’t have the same legacy cost structure.
Critics of the union say that the union should have been willing to give back more on labor. That’s easy to say, but hard to do; unlike many unions, which put their retirees on inactive status, UAW’s bylaws gave retirees considerable power. Naturally, by the time 90% of your membership is retirees, those bylaws are not going to be altered.
Critics of the company say that the company could have dealt with these problems by making better cars. How, exactly, were they supposed to make better cars when they were burdened by these huge legacy costs?
The company was burdened with these costs simply because it had made extraordinarily generous promises in an era when health care was cheaper — and when the firms and the union had a cozy arrangement that allowed them to pass any increase in their labor costs onto consumers.