Wages, Wages, Wages
Remember the railway workers that went on strike last year? Many in the media demonized them for grinding the country to a halt, but in the negotiatiations that followed, they ultimately won themselves a huge increase in wages. In the days thereafter, there was a barrage of newspaper headlines claiming that a wage-price inflation spiral was imminent.
Fast forward a few months, and the cost of railway transport stayed the same while the headlines disappeared into the ether of a 24hour news cycle. Now, we have UPS drivers, airline pilots, and auto worker unions all demanding similar wage increases.
The new demands by the United Auto Workers Union (UAW) seem pretty bold, as they include a 46% pay hike and restoration of employee benefits back to pre-2008 great financial crisis (GFC) levels. Predictably, this has led to howls from the auto execs & the wage-price spiral crowd (aka the wealthy).
Analyzing the Claims: Are They Accurate?
Labor costs are often seen as the largest cost, so it's natural to assume wage increases MUST lead to higher overall prices.
But are the "insiders" right? They assert that the new contract demands by the United Auto Workers union would add more than $80 billion to each of the largest US automakers' labor costs, potentially threatening the future of the car companies.
New contract demands made by the United Auto Workers union would add more than $80 billion to each of the biggest US automakers’ labor costs, according to sources familiar with the companies’ estimates.
That large an increase to labor costs over the contract’s four-year term could wipe out profits and threaten the carmakers’ futures, according to the source, who asked not to be named because the analysis has not been made public.
It would increase hourly labor costs to more than $150 per hour at Ford Motor Co. and General Motors Co., including wages and benefits, up from the $64 an hour GM, Ford and Stellantis NV workers make currently, the sources said.
Let’s evaluate this claim. First, we have sources that allow us to look at each company individually, but let’s start with Ford which revealed data heading into their earlier negotiations back in June 2023:
Ford is hoping to convince the union to give it more flexibility by noting that it employs as many as 14,000 more US hourly workers than either General Motors Co. or Stellantis NV, parent company of Chrysler and Jeep. Having the biggest US hourly workforce costs Ford an extra $1 billion a year compared to its domestic competitors, the sources said.
Ford’s labor costs, including wages and benefits, are $64 an hour, compared to $55 an hour at the non-union assembly plants of international automakers such as Toyota Motor Corp. That creates a labor cost gap of $900 million with the international automakers, the people said. Labor costs at Tesla Inc. are even lower at $45-to-$50-an-hour.
So they’re saying 14,000 extra workers at $64/hr equals an extra ~$1Billion in costs. This is the first step in fact checking their claims of $80B in additional total labor costs.
Based off these calculations, an additional 14K workers at $64/hr does equal $1.8B. Great. But I’ll point out that you’ll get similar results if you use the wage-only component. This means either fewer hours or fewer workers have to be at the core of the difference. But whatever, I’ll let it slide since it at least tells me that our approach & math makes sense. Let’s move on.
Using Ford’s total labor force and applying the claimed metrics from the automaker insiders, I can’t come remotely close to the estimated impact of $80Billion for Ford (much less the other automakers, which Ford notes employ FEWER workers).
And note that this assumes the $150/hr cost is correct and that hours worked remain the same despite a shift in hours worked from 40 to 32, which suggests that Ford’s non-wage costs TRIPLE over the next four years with zero associated productivity gains.
To state it plainly: the calculation that higher wages will cause an $80Billion increase in costs, as quoted by “insiders”, is 100% false. Literal Fake News.
I also want to point out that the UAW wage demands don’t even fully restore the UAW premium over the rest of the manufacturing sector from 2007.
Assuming manufacturing wages rise 2% per year over the next four years (the 2009-2019 pace), that would suggest average hourly manufacturing wages at $35.30 ($32.61 x 1.02^4). The UAW is asking for $40.88/hr in wages, only a 16% premium to the average manufacturing wage versus the 31% premium in 2007.
The Gross Margin Mystery
Let's look at Ford’s gross margin line. We discover a firmly deteriorating company with an unexplained short-term jump in profitability that almost perfectly matches the amount of $$$ UAW wants to reclaim for workers.
Looking at the same chart for GM, we see a slightly better picture, but again this “strange” jump in gross margin versus historical levels. I hate to say it, but the CEO of GM might not be the genius shareholders thought — as the growth in GM’s profitability has been built entirely on the backs of autoworkers accepting low pay, rather than genius corporate strategy. But Elon Musk could have probably told you that.
The Final Word
Will the workers win? I’m skeptical. If I had to guess, I’d say they’ll probably get their wage gains but not all the benefits and hours they requested. Why? Because since the 1980’s, labor unions have been completely hollowed out. The widespread belief that “unions are still powerful” is honestly absurd.
If we make a reasonable estimate that the UAW gets its wage requests and splits the rest. Their hours per week decreases from 40 to 36 and benefits appreciate proportionally to wages. If management can show just a modicum of talent, extracting 2% a year in productivity gains from their newly enriched labor force, this becomes a total non-story:
All of this highlights the importance of challenging accepted wisdom like: “Labor costs are the biggest cost for employers”. Because if we’re being real, this hasn’t been true for decades.