A Hard Pill for UAW Members to Swallow

Then-UAW President, Walter P. Ruether, addressing a union convention in the 1950s.

While an improving economy may give Detroit’s automakers some much-needed breathing room, there is little doubt that General Motors, Ford and Daimler/Chrysler face serious financial challenges for the foreseeable future. Whether they can recover will depend in no small part on the judgment and savvy of United Automobile Workers (UAW) President Ron Gettelfinger.

Right now, the situation is precarious. Ford and General Motors bonds are rated at close to junk-bond status, and stock prices over the last five years have dropped 40 percent for GM, 60 percent for Daimler/Chrysler, and 80 percent for Ford. There is much speculation, both on and off Wall Street, that one or more of the Big Three may have to file for bankruptcy in the next 10 to 15 years.

One reason for this decline is that the Big Three pay higher labor costs than their competitors, with wages that average $10 more per hour. Per-vehicle labor costs are as much as $1,000 higher for the Big Three than for foreign competitors.

Gettelfinger, at least in public, offers no relief. On the subject of health-care benefits, which are among the most generous of any industry, Gettelfinger is adamant: "Make no mistake about this, we are not going to shift health-care costs in negotiations with the Big Three. We’re not going to pick up premiums, we’re not going to pick-up co-pays, we’re not going to pick up deductibles."

Gettelfinger understandably sees this as a matter of protecting what autoworkers have gained at the bargaining table. But from the perspective of the manufacturers, the UAW’s demands look a lot like a raise. Health-care costs are increasing for all employers, and went up over 12 percent at the Big Three just last year. That translates into a hike of roughly 4 percent in the cost of employee compensation due to health care alone. With profit margins already razor thin, it is not at all clear that Detroit automakers can afford health-care cost increases of this magnitude.

So while Gettelfinger may succeed in maintaining health-care benefits, he does so at the risk of hastening the downfall of one or more of the companies that employ his members.

On the other hand, backing down is not without its risks either. The UAW has a reputation to uphold. Throughout the 1950s and ‘60s the UAW, under its founder Walter Reuther, consistently delivered generous contracts to automobile workers, creating the most prosperous cohort of unskilled and semi-skilled laborers the world had yet seen.

The key to Reuther’s success was "pattern bargaining," in which the UAW would negotiate with one company with the expectation that the others would sign similar agreements.

Pattern bargaining meant that the Big Three continued to compete on automobile design, features and marketing — but for the most part, assembly workers were shielded from the effects of competition by contracts that were similar for all three companies. Companies would pass along the increased labor costs to their customers, confident that the other automakers had similar labor costs, and would respond in much the same way.

Reuther’s strategy worked brilliantly as long as the UAW represented workers at all major automobile manufacturers. But that is no longer the case. Foreign competitors, whose workers are not represented by the UAW, now make up 40 percent of the American automobile market. All else being equal, these foreign companies can rely on the ability to sell cars that are comparable to those put out by the Big Three while spending as much as $1,000 less per vehicle on labor. That price advantage means that over time foreign carmakers are likely to take more and more market share from the Big Three.

Consequently, Gettelfinger no longer can shield UAW members from competitive pressure. Instead, the UAW must prepare domestic autoworkers for competition. Doing so will probably mean first finding a graceful way to back down on health-care costs, then putting labor costs on a glide path until they reach a point where Detroit can compete on more or less even terms with automakers overseas.

This will be a hard pill for UAW members to swallow. But real leaders find ways to make hard decisions. The conditions that Walter Reuther exploited so brilliantly have changed. Does Gettelfinger understand the basic economics? Can he find a way to make the UAW adapt? The future of the American auto industry, and much of Michigan’s economy, depends on the answers.

(Paul Kersey is labor research associate with the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland. More information on labor issues is available at www.mackinac.org. Permission to reprint in whole or in part is hereby granted, provided the authors and their affiliation are cited.)