GM-UAW Agreement - 4 Things - One Strike Cost vs. Benefit Analysis, Two Surprises and One Wish
Strike Cost vs. Benefit Analysis
Now that the tentative agreement has been ratified, it is time to look back and see if the strike was worth it for UAW members. Over the past few weeks, I have been challenging the GM strikers’ Return On Investment (in this case the Investment is defined as compensation lost during the six-week strike). Accordingly, I have been asked by several interested parties to assess the economic impact of the strike on a typical UAW employee. Therefore, I have selected a Traditional production employee for my illustrative example below. In order to draw a conclusion, one must first look at the four-year compensation as defined by the key economic elements of the Final Agreement ($24,034) and then subtract the four-year compensation had the employees accepted GM’s pre-strike offer ($15,755). While on strike, the UAW leadership was able to negotiate an additional $8,279 in compensation over the four-year agreement. However, as noted below, from that amount, we must deduct the cost of the six-week strike, estimated at $8,700, comprised of $6,000 in lost wages (~$1,000 per week - net of strike pay) plus $2,700 in lost profit sharing (the Center for Automotive Research has estimated that GM lost $450 million per week in profits). Therefore, as illustrated below, GM strikers are still out-of-pocket $421 ($8,279 gain minus $8,700 loss) at the end of the four-year agreement and they do not actually hit breakeven until the year after the contract expires.
This analysis looks purely at the economic impact of these specific contract elements over the four-year period. Accordingly, it does not factor in the intangibles such as improved job security, temporary worker issues, etc. Clearly, with the strike, from a longer-term economic perspective, the GM employees will be better off starting in Year 5 once breakeven is achieved. Was the strike worth it for the GM workers? Given all of the stress, anguish and uncertainty that the strikers had to endure over the six-week period, I am personally not convinced that this Return On Investment was worth it. Having said that, it is really not up to me to be the judge – the GM strikers are the only ones capable of objectively answering this question and I am sure that some will say yes and that some will say no….
In addition, on the surface the deal looks similar to what was negotiated in 2015, however GM may have cleverly saved over $200 million during the 2019 Agreement by flipping the order of the 3% wage increases and 4% lump sums. The first wage increase (in Year 2) is only paid for three years this time (vs. four years last time) and the second wage increase (in Year 4) is only paid for one year this time (vs. two years last time).
Surprise #1 – The parties did not aggressively address rising Health Care costs
One of my greatest fears came to fruition. GM and the UAW kicked the can down the road again with respect to health care (just like they did before in 2011 and FCA and the UAW did in 2015). At some point, the Detroit 3 Automakers and the UAW are going to have to address this issue. Currently, UAW members’ health care coverage costs the company close to $10 per hour worked. Using the Rule of 72, it is quite possible that health care costs may double in the next decade or so. Therefore, it is conceivable that at some point, the company’s health care costs for employees, on a dollars per hour worked basis, will exceed the starting UAW hourly wage rate. That is crazy.
UAW production employees will be making over $32 an hour by the end of this agreement, significantly more than the average U.S. manufacturing employee, plus they are only saddled with a 3% health care cost share versus the U.S. manufacturing industry average of 28%. Therefore, it is not as if UAW members cannot afford to pay more for their health care coverage – they just don’t want to. That may be acceptable to the automakers provided that UAW members realize that future wage increases may disappear at the expense of health care. At a cost of $10 per hour, coupled with a 6% medical inflation rate assumption, the automakers’ all-in labor costs are projected to increase by at least $0.60 per hour every year, just because of rising health care costs. To put this into perspective, that is similar to a 2% wage increase for an employee earning $30 per hour. Again, that is crazy.
The 2019 UAW-GM ratification highlighter simply declares “Cost-Shifting Rejected: No Changes to Health Care Plan” and it appears to focus on the fact that there will be no additional costs to members. In my blog on September 8, 2019, I pointed out a number of opportunities including employee consumerism initiatives that could help reduce GM’s health care costs while minimizing intrusiveness on UAW members.
Let’s hope that the parties agreed to at least discuss some of these types of health care cost reduction opportunities over the term of the agreement. If not, at some point the parties will need to do something fairly onerous to tackle this issue head-on. It may not need to be something as catastrophic as transferring company retiree health care obligations to a UAW-sponsored trust like in 2007, but it will definitely not be something trivial either.
Surprise #2 – No improvement in Income Security provisions for In-Progression employees
The UAW leadership appears to have been so focused on finding a path for temporary employees to achieve permanent employee status and reducing the time that it takes for In-Progression employees (hired after October 2007) to reach maximum pay, that they may have inadvertently missed the boat with respect to job and income security for these same workers, the ones who will be laid off first in the event of an economic downturn. It is just a matter of time, likely during the life of this agreement, that the U.S. economy will once again fall into a recession. Accordingly, similar to what happened during the Great Recession, automakers will likely be forced to place entire shifts of employees on indefinite layoff in order to adjust production levels to match consumer demand. When this occurs, UAW employees are placed on indefinite layoff in line with seniority. Accordingly, the most junior workers, namely the temps then low seniority In-Progression employees will be the first to go.
In-Progression employees (hired after October 2007) are only entitled to up to 26 weeks of company-paid income security benefits (see chart below for details). These employees are eligible for Supplemental Unemployment Benefits (SUB) payments that equate to approximately 75% of their weekly base pay. The company’s liability is effectively a top-up to these amounts as SUB is offset by any government-provided layoff benefits such as State Unemployment Compensation. State Unemployment Compensation benefits are generally worth approximately $400 per week with a typical duration of 26 weeks (coincidentally the same as the maximum duration for SUB benefits for In-Progression employees). In contrast, Traditional employees (hired before October 2007) enjoy up to two years (104 weeks) of company-paid income security benefits (see chart below for details). They receive up to 52 weeks of Supplemental Unemployment Benefits (SUB) at approximately 75% of their weekly base pay, then up to 52 weeks of Transition Support Program (TSP) benefits at 50% of their weekly base pay. An illustrative calculation assuming maximum income security benefit entitlements (at a $30 base wage rate) for both In-Progression employees (26 weeks = maximum company cost $13,000) and Traditional employees (104 weeks = maximum company cost $67,600) is outlined in the chart below. Note that these costs represent income security benefit costs only and do not reflect any benefit continuation costs associated with health care, etc.
Here is the risk. As noted above, In-Progression employees will receive minimal income security protection in the event of an indefinite layoff (maximum 26 weeks). Even worse, for example, an employee with less than 3 years of seniority making ~$20 per hour with 13 weeks of SUB eligibility, will only cost the company around $2,600 ($200 per week – net of State Unemployment Compensation benefits). During the last recession, income security entitlements for employees were much more expensive for the Detroit 3 Automakers, therefore, where cost effective, the companies would offer special incentive programs and/or enhancements to existing programs in order to encourage older workers to retire, ultimately reducing the number of junior employees that were subjected to indefinite layoff. Today, with minimal income security costs associated with In-Progression employees, what incentive will there be for GM to offer special programs to retirement-eligible employees in order to save the job of a junior employee? Alternatively, if the indefinite layoffs affect Traditional employees, the company may consider offering special incentive programs in order to avoid placing more expensive higher seniority Traditional employees on indefinite layoff. I realize that it is quite easy for me to sit back and be an armchair quarterback, but I must say that, in the event of an economic downturn, this potential oversight by the union may prove to be a pretty big faux pas. In hindsight, perhaps the UAW bargaining committee should have considered a more balanced approach with respect to In-Progression employees, with more emphasis on improving their income security protection and less emphasis on migrating them to maximum base wage rates faster. Finally, if one of GM’s bargaining goals was to minimize downsizing costs and improve their odds of surviving the next recession, then GM Vice-President Scott Sandefur and his negotiations team deserve an “A plus” for anything that they did to secure this aspect of the deal.
The UAW has now had three consecutive agreements (2011, 2015 and now 2019) to address the “sacrifices” that their members made during 2009. Enough already. Please grant me this one wish - let’s not hear about the “2009 Concessions” all over again in 2023.
Reflections and the Verdict
Strike analysis aside, UAW-GM Vice President Terry Dittes and his team negotiated an excellent deal from a new economics perspective for his membership. Unfortunately, the parties were unable to come to an agreement that improved overall labor cost competitiveness. I have always said that the best form of job security is simply ensuring that your labor costs are competitive. Therefore, I have concerns for the UAW membership in the long-run. I am confident that GM will live up to its new job and investment commitments during the term of this agreement. All bets are off after that though – soon the GM long-range planning team will be making future investment decisions based upon the terms of this agreement. In addition, it should be pointed out that, in all likelihood, UAW – Detroit 3 Automaker labor costs will now exceed Unifor - Detroit 3 Automaker labor costs in Canada, at a par dollar! Unions must always be fully aware of where they stand in terms of internal labor cost competitiveness for new product allocation purposes – in this case we are talking about Canada here, not Mexico or China.
Finally, the verdict – in my opinion, the strike was not worth it for either GM or the UAW for a number of reasons. While GM did an excellent job in preparing themselves for the next downturn, they did suffer significant financial losses over the six-week period and in the process, may have alienated more than a few current and future customers. From a UAW perspective, I personally do not think that the Return On Investment of the strike was worth the trip for the strikers from a pure economics perspective. A four-year plus payback period does not seem all that attractive given the stress and anxiety that the strikers had to endure. In the long-run, the UAW may have priced themselves out of the market for future product allocations – time will tell. In addition, this lengthy strike will do nothing to support the UAW’s organizing efforts down south. Finally, as noted by a couple of reporters, this strike may have sent a message to the public that Old Detroit is back and they have not learned their lesson. This does not bode well for either party. In conclusion, neither party really profited from this strike, neither side rarely does….
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