US Auto Industry:Effects of Labor Unions

Dr. Gomis-Porqueras

ECO 680

Industry Overview• Over the past decade, Big three has lost

10% of market to foreign rivals• Labor unions have caused US auto industry

to become less competitive• Companies with unionized workers are

losing market share to those without• Labor issue is an example of Principal-

Agent problem• Net Income:

Toyota: 2005 11.7 billion, 2004 10.9 billion

GM: 2005 (10.6 billion), 2004 2.8 billion

US vs. Foreign Brands

UAW represents both Lincoln and Cadillac workers. The UAW does not represent any BMW, Lexus, or Mercedes workers

Sales of US brands vs. Foreign Brands• 1999: GM & Ford sold 16M autos

– Toyota sold 5.2M.

• 2005: GM & Ford sold 14.5M autos– Toyota sold 8.1 M

• Cost of Revenue is 20% higher for GM than Toyota

Unions Demand High Wages• Delphi paid $76/hour to factory workers• GM must pay 95% of wages to laid off workers• GM pays full health benefits to 340,000 retired

workers• Of every car DCX sells, $2,000 goes to union

benefits• After Delphi filed for bankruptcy, they offered UAW

wages of $12.50, down 60% from $27…offer rejected

• Ford factory in Toledo, Ohio: 680 people earn $25 to $30 an hour making bumpers.

• Nissan plant in Tennessee (non-union) pays $12/hour to line workers

Workers get Laid-Off:2006 Headlines• Ford to cut 30,000 jobs and offer all 75,000

union workers buyouts• Ford to close 16 plants in the next two years

• GM announces it's wiping out 30,000 jobs

by 2008 - 27% of its hourly workforce • DaimlerChrysler to cut production and

vehicle shipments by 16 %, or 135,000

vehicles, for the second half of 2006

Food for thought…• “We’ve got to stop pretending that the global

economy operates on some Economics 101 textbook model of pure competition and open markets … and that the hollowing-out of America’s manufacturing base, lower living standards for America’s working families and widening economic disparity in the United States are simply the consequences of the impersonal forces of globalization.” - UAW President Ron Gettelfinger

• “Starbucks for some time now has spent more money on health care than it does on coffee – just as GM has for some time spent more on health care than it does on steel.” - UAW President Ron Gettelfinger

• “One of the primary requirements listed by foreign automakers when choosing a US factory is the absence of union influence” – Claude Canup, President of Canup & Associates (automotive consulting firm)