GM and the UAW Tentatively Agree on New Contract

Earlier this week the United Auto Workers called for a nationwide strike against General Motors, and just two days later a new contract seems to be agreed upon. Details are still a bit sketchy, but for the sake of my friends and family who rely on a paycheck from GM, it is great that this was hopefully resolved without much disruption.

Highlights of the Deal

One of the major benefits of this contract is the retiree health care trust, which has been in discussion for quite a while. With this trust in place, GM would give control of the trust to the UAW, and the company itself would fund 70% of it. This is good news because it will save GM money. It isn’t the best possible solution, but it is probably the only compromise that would work.

The big wild card that hasn’t been discussed is the demand for job security, which was at the focus of the strike. What concessions did GM make in order to please the UAW so quickly? Job security is a difficult thing to promise, and even if you can maintain whatever competitive edge you have currently with domestic plants, who’s to say the market won’t change in five or ten years before we’re at the same point? It will be interesting to see the actual details regarding this.

The Labor Cost Disparity

This is the big point that I was discussing in the comments of the earlier post this week, and that is the union has created an unbelievable labor cost disparity compared to the Japanese automakers. From an Associated Press article this morning:

The company went into the negotiations seeking to cut or erase what it said is about a $25-per-hour labor cost disparity with its Japanese competitors.

That number blows my mind. Most factory workers shouldn’t even be making $25-per-hour, let alone simply a disparity with competitors. I realize that this is is not strictly a disparity in wages, since there are other labor related expenses included as well, but let’s do the math for a second.

There are around 73,000 union employees at GM. If you simply take the $25/hr disparity number and figure the averae employee works a 40-hour week. When you multiply that out, you get a staggering number of almost $3.8 billion per year. That is billion, not million, each year that is simply based on excess labor costs compared to your foreign competitors. Knowing that, is there any surprise as to why GM, Ford and Chrysler are doing so poorly?

Another quote in that same article says that the terms of this contract will close that disparity. While I do think new terms will help, at least in the short-term, with the constantly increasing wages and bonuses, pension and health benefits, this will not be sustainable over time. A perfect example is this bit of information from the AP article:

…two people briefed on the contract told The Associated Press that it also would give workers bonuses and lump-sum payments… Wages would stay the same for the length of the four-year deal, but workers would be given a bonus of $3,000 once the contract is ratified and then bonuses of 3 percent, 4 percent and 3 percent of their annual pay each year for the last three years of the contract, said one person briefed on the contract details.

So, the agreed to give an already overpaid workforce a bonus of $3,000? What for? The company isn’t profitable, so it isn’t rewarding them for that. Is it making up for the 2 days without work? Well it could be, but for most people that would come out to just a couple hundred dollars. So GM has to fork over about $219 million to pay for the first year bonuses, when they lost almost that much money just while the strike was taking place for the last two days.

Lower Wage Structure

The good news from this proposed deal is the lower starting wages. They have agreed to reduce the wage structure for certain job classifications, and even offer buyout packages for early retirement for existing workers in order to make room to hire new employees. This is great news because it begins to reduce some of that absurd wage disparity by getting rid of high-seniority people making far more than they should be for their job, and then open up more positions for new employees which would be on the more appropriate lower wage structure.

The deal also includes language that mitigates the impact of the jobs bank, in which the company pays laid-off workers most of their salary and benefits. This was another huge burden on the company when they had to essentially pay someone that they laid off almost their entire salary and benefits. This is absolutely absurd to have to pay employees that aren’t working. Without knowing details, it is hard to say how big of an impact this will have, but reducing the amount of money laid off workers receive should help.

Will it Work?

It is hard to say. The union has used whatever power they have left to make a point, and it appears as if it may have worked for now. There are certainly some highlights of the new plan that at least address the wage issue, but there is still plenty left on the table that may not hold up. GM continues to struggle, and I don’t know how this will affect the bottom line. It certainly has the potential to save some money, but this looks like only a short-term band-aid that won’t hold up more than a few years.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

9 comments
jennygoren
jennygoren

On June 1, General Motors brought to the table a plan intended to reduce their pension liability by 26 billion dollars.  The plan will affect approximately 42,000 U.S. GM qualified beneficiaries and retirees.  The website http://www.gmpensionbuyout.net has helpful information that outlines changes for plan participants.  With a deadline of July 20, 2012 fast approaching, it is suggested that any decisions be reviewed by a qualified financial planner before being finalized. 

Okinawa
Okinawa

$25-per-hour labor? Wow, where do I sign up!?

Patrick
Patrick

I was out of the country when all of this went down, and I think this is interesting to catch up on it. Thanks for putting this into a concise article.

I think GM has a ways to go before everything is solved, but I hope they make it - for the company and the workers.

Asset Manager
Asset Manager

I was glad to see this situation solved so quickly but do you think, given your comments on wage disparity, that this could be the beggining of the end for GM?

Jeremy
Jeremy

I agree that is a bit of a generalization, of course. I grew up in a UAW household, and both of my parents have, and still do work for GM, not to mention half of my relatives. You should hear the stories... I think the auto industry is a lot different than the aerospace industry, or at least maybe part of it has to do with location as well.

But there is almost no reward for advancement. You would expect, as you stated in your example, that you are supposed to increase your skill set and take on more responsibility in order to increase pay, but this is the exception, not the norm.

Take my mother for example. She's been there for over 25 years. This time was spent doing the exact same thing--sitting in a chair and sticking a little spring into a hole in a part that comes down the line.

That's it, a monkey or robot could do it, yet there are times when she can bring home close to 80k/year. She has worked with some of the same people in the same department for over a decade and it is the same. Nobody has advanced, and nobody wants to. Why take on more responsibility when your pay continues to skyrocket based on your seniority?

Of course there are people who want to advance their careers and can take the initiative to advance and make even more money, but since you can make so much money just by staying with the company doing the same thing, what is the incentive?

So, I agree that it may have been a bit generalized, but the union has created an environment that rewards loyalty, not performance or advancement. That is why you have so many 70+ year olds still working in the factories.

wes
wes

I agree with you regarding this "Joe with a six pack" example; however, as someone who has worked in the manufacturing sector their entire career, I happen to believe that this example is a gross generalization. First, many auto workers are skilled. The unskilled labor begins at, somewhere about 10-15/hr. But once you have your foot in the door, you are supposed to develop your skills as a worker. Not everyone in an assembly plant is sweeping the floor or carrying buckets of rivets from one assembly station to the next. Now be it, I have worked in the aerospace sector, not automotive, but the lessons are transferable. Most people working in factories are hard working people trying to provide for their families and better themselves.

I also disagree with the idea that a college education gives a person a right to a middle class living. Hard work does, and history supports this fact. (See the book 'The Millionaire next door'). The idea behind the Auto worker, as supposed by Henry Ford, was that the worker would be paid to a level where he would be able to buy the car that they have built. Seemingly impossible in todays world (I know I can't afford to buy new - but hey, I'm happy to save my money for security now and use later in life). But this chicken or the egg argument is best suited for a different post.... I'll end with pointing out that, as with many things, one bad apple spoils the bunch.

Keep up the good work Jeremy!

Jeremy
Jeremy

That's right, Wes. I alluded to that in a previous comment, but the average UAW worker makes between 50-60k/year. And like you said, it is a pretty decent middle-class wage, but the main point is that this is for unskilled labor.

In the midwest, it isn't uncommon for many professionals with graduate degrees to make less than this even years into their career, yet you have Joe six-pack with a GED sitting on an assembly line doing a simple repetitive task earning more than most middle-class Americans.

Sure, overhead costs make up a large part of disparity, but even the average of $27/hr is far above what the market says someone in this capacity should be making.

wes
wes

The company went into the negotiations seeking to cut or erase what it said is about a $25-per-hour labor cost disparity with its Japanese competitors.

I haven't read the AP article you got this from, but I just wanted to comment here, in case it is unclear to anyone, that this number is skewed with burden and overhead costs. The actual average pay that a UAW member receives is $27/hr. Or approx $55K per year before taxes. This is a decent middle class wage, but nothing to write home about. I know that in Japan there are no auto workers making less than this (comparatively), however the basic structure of pension and retirement in Japan.

The Dividend Guy
The Dividend Guy

I new I should have bought some GM when it was at $30 a few weeks ago - but I don't invest like that! This could have gone either way and the share price could have to. Thanks for the quick analysis on it - saves me wasting time piecing together various newspaper articles on the subject.

The Dividend Guy