Tuesday, December 16, 2008

$73 an Hour: Adding It Up

Seventy-three dollars an hour. That figure — repeated on television and in newspapers as the average pay of a Big Three autoworker — has become a big symbol in the fight over what should happen to Detroit. To critics, it is a neat encapsulation of everything that’s wrong with bloated car companies and their entitled workers.

So what is the reality behind the number? Detroit’s defenders are right that the number is basically wrong. Big Three workers aren’t making anything close to $73 an hour (which would translate to about $150,000 a year).

The calculations show, accurately enough, that for every hour a unionized worker puts in, one of the Big Three really does spend about $73 on compensation.

1) Wages, overtime and vacation pay, and comes to about $40 an hour.

2) Fringe benefits, like health insurance and pensions amount to $15 an hour or so.

Add the two together, and you get the true hourly compensation of Detroit’s unionized work force: roughly $55 an hour.

It’s a little more than twice as much as the typical American worker makes, benefits included. The more relevant comparison, though, is probably to Honda’s or Toyota’s (nonunionized) workers. They make in the neighborhood of $45 an hour, and most of the gap stems from their less generous benefits.

3) Benefits for retirees, by dividing those costs by the total hours of the current work force you get a cost of $15 or so per hour.

Total labor cost: Wages - $40, Benefits - $15, Retiree Benefits - $15, Total $70.00 per hour.

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.

We should also compare executive compensation. At Toyota in 2006, the top 37 executives earned a total of $21.6 million, just about as much as Alan Mullally, CEO of General Motors, made in 2007. Toyota's top executive made only $903,000 the year before."

Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits. That’s roughly the gap between the Big Three’s retiree costs and those of the Japanese-owned plants in this country. Imagine, also, that the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour — the same as at Honda and Toyota.

Do you know how much that would reduce the cost of producing a Big Three vehicle?

Only about $800.

That’s because labor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle.

An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say.

Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler. So, the actual solution must include making a better product.

The economy is in the worst recession in a generation. You can think of the Detroit bailout as a relatively cost-effective form of stimulus. It’s cheaper to keep workers in their jobs than to create new jobs.

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