Mike the Mad Biologist

David Leonhardt does a good job of explaining the lies surrounding the bogus $73 per hour compensation that the Big Three autoworkers supposedly receive–even if he does so rather elliptically. Here’s how that $73 figure is reached:

1210-biz-webLEONHARDT

You’ll notice that past compensation is a big part of the problem. As Leonhardt puts it:

The crucial point, though, is this $15 isn’t mainly a reflection of how generous the retiree benefits are. It’s a reflection of how many retirees there are. The Big Three built up a huge pool of retirees long before Honda and Toyota opened plants in this country. You’d never know this by looking at the graphic behind Wolf Blitzer on CNN last week, contrasting the “$73/hour” pay of Detroit’s workers with the “up to $48/hour” pay of workers at the Japanese companies.

These retirees make up arguably Detroit’s best case for a bailout. The Big Three and the U.A.W. had the bad luck of helping to create the middle class in a country where individual companies — as opposed to all of society — must shoulder much of the burden of paying for retirement.

What has struck me throughout all of these discussions, however, is that Honda’s and Toyota’s current lower wages and benefits are seen as ‘natural’, while the Big Three’s are seen as inflated. It’s odd to hear progressives and liberals argue that the Big Three autoworkers really aren’t getting paid that much more than Toyota’s.

No one is asking why foreign-owned companies in the U.S. aren’t paying their workers more. After all, if they’re making a better and more profitable product, shouldn’t their workers get paid as much? (and before you get all het up about the cost of labor, even at the Big Three, according to Leonhardt, labor costs account for ten percent of the cost of a car).

There’s a very simple reason why the foreign-owned companies don’t pay their workers as much: they’re based in states that make it very difficult to organize unions. This isn’t the free hand of the market or some organic, inviolate phenomenon. There’s nothing ‘natural’ about it. It’s simply a result of the lack of bargaining power for workers.

So why aren’t progressives (well, never mind them…)….so why aren’t liberals responding by asking why do U.S.-located Japanese car factories pay so poorly?

Comments

#1 Dan
December 11, 2008

The point of the article was that the big difference in costs were legacy costs- the money that goes to retirees. Foreign-owned companies have been manufacturing in the US for much less time, so they have fewer retirees and hence lower legacy costs. Q.E.D.
#2 Becca
December 11, 2008

Does this mean Toyotas will cost more in another 20 years when they have legacy costs to pay?
Will Korea (or someone) come along and start up new car companies and undercut the Japanese in 20 more years?
Or did the lack of proper unionization prevent that?
#3 Dunc
December 11, 2008

Looking at the graphic, the main difference (excluding legacy costs) is in “wage related” costs – vacations, overtime, and out-of-hours pay. It’s entirely possible that the foreign-owned firms simply use less overtime and out-of-hours work (possibly by dint of employing more people). I’m not saying this is the case, I’m just saying that you can’t know based on the information available here. There is also the possibility that the foreign-owned firms use less skilled labour and more automation.

To answer the question properly, you’d need to look at what equivalent workers earn for equivalent work, rather than simply divying up the total bill by the number of employees.
#4 Kevin
December 11, 2008

I am an industrial electrician at a (soon to be closed)GM SUV plant. It is worth noting that the compensation packages for top execs at Toyota and Honda are substantially less than those of their Big 3 counterparts.
#5 D. C. Sessions
December 11, 2008

There’s a very simple reason why the foreign-owned companies don’t pay their workers as much: they’re based in states that make it very difficult to organize unions. This isn’t the free hand of the market or some organic, inviolate phenomenon. There’s nothing ‘natural’ about it. It’s simply a result of the lack of bargaining power for workers.

Looking at the chart provided, the Japanese workers are being paid about 10% less than the Detroit workers. Before introducing non-market hypotheses, it would be worthwhile to compare cost of living differences and other purely market-based factors.

I doubt that the administrative overhead for the unions amounts to a serious fraction of that 10% though.
#6 Matt Platte
December 11, 2008

The Big Three and the U.A.W. had the bad luck of helping to create the middle class…

Nope. They created a well-paid working class.
#7 jay
December 11, 2008

What has struck me throughout all of these discussions, however, is that Honda’s and Toyota’s current lower wages and benefits are seen as ‘natural’, while the Big Three’s are seen as inflated.

That’s not so far fetched. They are much beyond the pay structures of most production employees, they were born of a time when with little competition, overly generous pay for largely semi-skilled work could be justified. (One might also wonder why an employer should be paying for retirement costs long after the worker is gone)

Of course this cost does not get paid out of thin air. It’s paid by customers, many of whom make no where near the amount of money these guys are making. So where are they going to shop?
#8 Scott
December 11, 2008

Becca asked:

Does this mean Toyotas will cost more in another 20 years when they have legacy costs to pay?

That depends. If Toyota and Honda have a “modern” 401(k) or IRA-based retirement plan, that is an individual “defined contribution” retirement plan, rather than a group “defined benefit” plan typically enjoyed by union members. With an individual “defined contribution” plan, then the retirement costs will remain off of the company’s books, will be born by the retirees, and will not effect the cost of future cars.
#9 oyun
December 11, 2008

? have followed your writing for a long time.really you have given very successful information.
In spite of my english trouale,I am trying to read and understand your writing.
And ? am following frequently.I hope that you will be with us together with much more scharings.
I hope that your success will go on.
#10 Coriolis
December 11, 2008

“Does this mean Toyotas will cost more in another 20 years when they have legacy costs to pay?”

Probably not since they simply wouldn’t provide retirement benefits like the big three’s in the US. Toyota/Honda have been operating in Japan for a long time, and there are apparently no issues with that. Maybe because Japan has far more serious government social services than we do and hence lower costs for companies to provide a socially acceptable quality of life for workers. Kevin is also right that their executive compensation (as compared to average worker’s pay) is much lower than US management (this is true for practically all companies, not just autos).

In any case though, as much as conservatives love bashing unions, as mike points out labor costs are apparently only 10% of the price of a car. The problem is bigger than that.
#11 hibob
December 11, 2008

“Does this mean Toyotas will cost more in another 20 years when they have legacy costs to pay?”
Nope. Toyota lays off its older/more senior US employees before they become expensive like that.
#12 Janne
December 11, 2008

Use bailout money for a national healthcare and retirement system instead, and benefit all companies rather than just the three most visibly in trouble?
#13 JThompson
December 11, 2008

In Alabama we have a Hyundai plant, a Honda plant, and a Toyota plant.
Brings a bit of perspective to why our stupid senator was on TV screaming bloody murder about how wrong it would be to bail out the big three, doesn’t it?

Average gross pay in this state is around 30,000 according to most of what I could find. I would’ve actually guessed lower than that. Other than myself I know very few people that break 30k.
49 an hour works out to just over $100k a year with no overtime and no benefits of any kind factored in. So about 3 times the average.
We also have a Mercedes plant that pays pretty much what the Japanese manufacturing plants do.

I’m actually in favor of the bailout and pro-union.
Just pointing out there are other reasons besides being in a state that isn’t union friendly.
A far lower cost of living means you don’t have to pay as much for your employees to live just as well.
#14 oyun
December 12, 2008

That’s not so far fetched. They are much beyond the pay structures of most production employees, they were born of a time when with little competition, overly generous pay for largely semi-skilled work could be justified. (One might also wonder why an employer should be paying for retirement costs long after the worker is gone)
#15 Mike
December 12, 2008

“No one is asking why foreign-owned companies in the U.S. aren’t paying their workers more.”

I suspect the reason they don’t is that they’re foreign owned, and can up sticks and leave if they think the US isn’t a profitable market.

The only way I can think of off hand (and that I can think of it doesn’t mean I think we should do it) to counter that would be to institute a protectionist policy, where imports are taxed heavily if the workers are paid less than the local equivalents.

It is also hard to persuade a company that makes 4.5 billion worldwide in three months that it has been doing it wrong and should copy the one that loses 12.7 billion a year – even more so when it is now slashing its profits forecast and seeing its shares drop rapidly.
#16 Uncle Al
December 12, 2008

What is the 21st century First World value of a strong back? Essentially nothing. Cost and price must be coupled. That is why China is a hotbed of manufacture and America is “post-modern”.

Only personal responsiblity can succeed. When an employer makes social decisions for its employees it must make compromises. No centrally-managed enterpise subject to the complexities of compromise can succeed. It is a mathematical impossibility,

http://www.mazepath.com/uncleal/comprom.htm

Parris Island made Marines. Marines never failed. Add political, Media, and gender issues. Marines now never succeed.
#17 QrazyQat
December 14, 2008

In Japan Toyota and Honda (and I would assume other car companies) also pay very large bonuses to their workers. Like more than $20,000/yr. On top of salary and benefits. They manage to make competitively-priced cars anyway.
#18 mirc
March 9, 2009

thanks