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Auto Worker Compensation

December 15th, 2008 Leave a comment Go to comments

I came across this New York Times article, shedding some more light on the highly controversial $70+/hour ($150,000+ per year) that auto workers allegedly make.

The essence of the article is that the $70+/hour figure that has been the focus of much attention is not entirely correct – it’s actually lower than that. However, it’s still much higher than Japanese auto makers like Honda, Toyota, and Nissan. The average hourly cost of a Big Three unionized worker is $73. The chart below breaks it down for Ford (whose cost is $71/hour).

Auto Worker Compensation Break Down

Auto Worker Compensation Break Down

 The cash paid to a worker (i.e. the salary your paycheck reflects) is about $40/hour, and benefits (health insurance and pensions) add another $15/hour, bringing this component of compensation to $55/hour. This is about twice what the average American makes, which should serve as a key counter-point to Mr. Stein’s comments:

They are our brothers and sisters. They fight our wars. They maintain our middle class lives. Maybe they get paid a lot, but they have been giving back for years. When will it ever be enough?

The NYT article notes that the salary plus benefits cost at Japanese auto makers is about $45/hour, with the $10/hour difference coming mostly from the benefits, not the cash compensation.

The remaining $15/hour of the about $70/hour for Big Three employees comes from benefits for retirees. These are costs that must be paid since they were promised, and are independent of the number of cars sold. So, in economic times like these, the revenue from car sales falls sharply, but the costs don’t since they’re fixed – now you see one dimension of the auto industry’s issues. The article goes on to say that this cost is a function of both the generours benefits and the number of retirees – suggesting that as Honda and Toyota mature to where the Big Three are on the American manufacturing scene, they too will have many retirees and similar costs. Of course, there are a few key differences – the benefits at the Japanese makers aren’t as high, and I doubt they’ve hired as many people due to improvements in automation as well as leaner product lines (they’re not making as many varietys as GM, thus likely employing fewer people). Yes, retiree costs at Japanese costs will go up in the future, but I’d be surprised if it was anything like what we’re seeing at the Big Three today.

The NYT article makes a very important point: Even if we took away the $10 of the $15 for retiree benefits and trimmed down the cash compensation to $45, to match the Japanese auto manufacturers, we’d save the Big Three $800/vehicle. The article also mentions that the Big Three typically sell their cars for about $2,500 less than the equivalent cars from Japanese manufacturers, suggesting that the cost saving won’t fix the problem. The issue – that Americans just don’t want to buy American cars.

Quality and efficiency problems have plagued American cars for years. The Big Three claim they have learned their lesson, yet their sales numbers beg to differ. For the 25 years or so that Japanese cars have been selling here, they continue to gain market share.

There is no doubt that improving the cost structure for the auto makers will help - in a situation like this, every penny helps. But it alone will not be sufficient to solve Detroit’s problems. The Big Three have to completely reorganize their operations. And it seems to me that the best way to do that is some kind of organized bankruptcy (where they re-emerge as much smaller, more efficient operations), or some kind of organized sale to the Japanese brands (with obvious conditions around keeping American jobs and manufacturing).

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