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Saturday, September 29, 2007

Analysis of UAW and GM Contract

I wonder if anyone who reads my blog is a member of the UAW, or knows someone who is a member of the UAW? They might appreciate my analysis of their recently announced contract.

The UAW and GM announced they had reached a tentative deal on a new contract. It isn't official until ratified by the union members. Overall, my analysis is that it was a huge ripoff for the UAW employees and retirees. However, the union was backed into a corner. GM is losing so much money that it might have been better off if it stopped making cars completely. If the union didn't give up major concessions, they may have seen a complete default in a GM bankruptcy.

There's another defect of unions. Why does a majority (50%) have the right to negotiate for everyone else? If a UAW worker disapproves of the union's deal, he can't refuse and negotiate separately. A retired GM employee can't say "This is a bad deal and I refuse to support it."

I'm not 100% sure of the details. I'm basing my analysis on news reports of the contract.

GM has an estimated $51 billion liability for retiree health care costs. GM agreed to pay $36 billion into a trust run by the union. The difference will be made up by charging retirees for their health care. However, when you consider the rate of inflation and the rate of increase in medical costs, the $51 billion official estimate is most likely to be way too low.

GM's pension plan is, at the moment, overfunded. Recent increases in the stock market have probably caused the pension plan to be overfunded. The retired GM employees will receive an increase in their pension to offset the increase in health care costs THIS YEAR. Of course, their health care premiums are probably going to rise dramatically in future years.

That has me completely puzzled. What right do employees currently working at GM have to negotiate for retired GM employees? When they were working, GM had agreed to pay 100% of the retiree health care costs. Now, GM gets off with a one-time payment of 70% of the estimated cost, and that estimate is very likely lowballed. Why can't the retirees say to GM "You promised us 100% when we were working. The current employees can't negotiate a default." On the other hand, 70% is better than zero. Recent law changes say that employers can default on retiree health care benefits.

When the premium for the retiree health care coverage rises to 50% or more of the cost, the plan will fall apart. Sick employees will choose coverage. Healthy employees will gamble with being uninsured or choose other insurance. This causes selection against the plan, further depleting the plan's assets. After 5-7 years, that statute of limitations will have expired and the retirees will probably be left without health insurance.

Current GM employees negotiated a 0% raise over the life of the contract. They will receive a one-time bonus of $3000 upon ratification, and bonuses of 3%, 4%, and 3% each year after that. There is no increase in base salary. There just are these one-time bonuses. When you consider that inflation is 6%-15% per year (depending on how you measure inflation), that means that the UAW effectively negotiated a pay cut of 15%-30% over the life of the contract after inflation.

GM agreed to not lay off any workers over the life of the contract.

The UAW also let GM hire new workers at lower rates. When a union approves a two-tiered wage system, it's like the union agreeing to its own suicide. In 4 years, when the next contract is being negotiated, around 20-50% of the employees will be on the lower wage scale. Why would those employees be willing to protect the jobs of the older workers who are earning more? In the next contract negotiations, GM could offer a contract that boosts the lower paid workers while giving the higher paid workers a bad deal. The lower paid workers will obviously vote to accept such a deal. Historically, pretty much every two-tiered wage system has ended like that.

Only some classes of jobs will qualify for the lower wage scale. It's unclear how many workers would be on the lower scale, so my estimate of 20-50% may be high.

If I were one of the executives at the UAW, this is a sweetheart deal. They get to manage a $36 billion fund. If I were an executive at the UAW, I would find friends who are running mutual funds or hedge funds and let them manage the health care fund for me. With mutual fund fees of 1-2% and hedge fund fees of 2% plus 20% of profits, that's a profit of $500 million or more per year to be had managing a $36 billion fund. I'm sure that the UAW management will receive lots of kickbacks from the mutual fund managers and hedge fund managers chosen to manage the health care fund. It won't be obviously traceable kickbacks. For example, the brother-in-law of a UAW executive might be hired into a high-paying position at the hedge fund where the UAW invests its assets. The UAW may claim that they don't do such a thing, but you can't fool me.

If I were a GM retiree, I'd rather have a check representing my interest in the health care fund, rather than let the UAW management loot it. Of course, the retirees are not offered that option.

The average worker is being shafted on both sides. He is being cheated by GM and cheated by his own union. The retirees will have health care for a few more years, and then the fund will be spent and stolen. I don't understand why current GM workers have the right to negotiate for retired GM workers.

Actually, the headlines are accurate "GM, UAW win in contract negotiations". It is a great contract for GM's owners and management. GM ditched its huge retiree health care liability at a fraction of the fair value. The official price of the health care liability is almost definitely a lot less than the actual cost. GM offered negative inflation-adjusted salary increases. GM instituted a two-tiered wage system that will make the next negotiating session much easier. The workers on the lower tier will be looking out for their own interests and not the higher tier. It is a great deal for the UAW management, who have a $36 billion fund to loot and pillage via pseudo financial planning; their mutual fund and hedge fund friends will make a killing. The average worker is, of course, totally screwed over.

Kevin Carson says that regulation of unions pretty much destroyed their effectiveness. Unions evolved to compensate for the fundamental structural flaw in the economic and political system. Originally, unregulated unions were extremely effective. The wealthy owners of corporations had huge advantages over average workers. Wildcat strikes, work slowdowns, and other guerrilla tactics were much more effective than negotiating sessions, cooling off periods, and declared strikes. A guerrilla army defending its home turf can usually defeat an organized army that wears uniforms and march in rows. Regulation of unions changed them from effective guerrillas into soldiers wearing bright uniforms who march in rows, fighting an enemy with superior resources. Regulation of unions has turned their leaders into red market enforcers instead of true workers' advocates. Union management are more like bureaucrats protecting their turf than people who help workers. The contract needs to be good enough so that the workers approve it, but there's really no incentive for union management to have a prolonged strike or genuinely advocate for their workers.

If you aren't convinced this deal totally gives workers the shaft, look at it this way: GM's stock went up a lot after the deal was announced. The current economic system is a negative sum game. If GM's shareholders benefit from the deal, that means someone else must have been screwed over. The people screwed over are the UAW's retirees and the current UAW employees.

Of course, both corporations and unions are going be be gone in the new economic and political system.

1 comment:

Kevin Carson said...

Thanks for the link, FSK. I think GM workers should have demanded the same rights as any other creditor who got the shaft. One possibility might have been shares of stock to compensate for the amount of their pensions defaulted on. I don't know how much GM stock is held by the corporation, but if necessary every share of it ought to be forfeited to the workers.

I've noticed that the people who tsk-tsk the most about the "unreasonable" levels of auto worker compensation are the same ones who defend skyrocketing executive compensation, with CEO pay growing over the past 20 years from 40 times to 500 times the pay of the average worker. And management salaries today are around 40% of total compensation to labor, as opposed to about 27% in the late '70s. Never hear them blamed for the industry's problems, for some reason. Golly, dya think maybe they get pensions, too?

BTW, it's quite possible that GM will get out of the business of actually making cars. As Eric Husman of Grim Reader blog observed, it's not much of an exaggeration to say the only part of a GM car actually built in a GM plant is the hood ornament. Almost their entire profit stream comes from the auto financing arm rather than production. As Husman also pointed out, most of their profits in "good" years probably comes from the sale of another couple of plants.

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