September 18, 2023
The strike of the UAW against the Big Three automakers raises many important issues that go well beyond the auto industry. It is worth taking a closer look at some of them. As I go through these, I should be clear that I have no inside knowledge about the negotiations, I just know what has been reported in the media.
Low Pay of Autoworkers
The first thing that is striking is how much the pay of many unionized autoworkers has fallen relative to economywide productivity. Going back forty years, a UAW job in the auto industry would have been a real prize for a worker without a college degree. The pay of an autoworker was sufficient to raise a family on a single income and send kids to college. It also covered health care and provided for a comfortable pension in retirement.
To be clear, there is nothing golden about a single-earner family. It is great that there are increased opportunities for women so that most are in the paid labor force. But, we would expect to see a two-earner household have a considerable income dividend over a one-earner household. This is often not the case.
According to reports in the media, many of the “temporary” workers in the industry are getting just $18 an hour. From 1938 to its peak purchasing power in 1968, the minimum wage rose not just in step with prices but also with productivity growth. This meant that minimum wage workers got their share of a growing economy.
After 1968, the minimum wage failed to keep pace with prices, with workers falling behind inflation. If the minimum wage had continued to keep pace with rising productivity, it would be over $25 an hour today. This means that many UAW workers are now being paid less than a minimum wage worker would have received in 2023 if Congress had kept raising the minimum wage in step with productivity, as it had done from 1938 to 1968.
Higher Productivity Can Mean Less Work, Not Fewer Workers
When the media are not hyperventilating about declining populations leading to a labor shortage, they are hyperventilating about how AI and robots will lead to mass unemployment. (Yes, those are complete opposites.) In fact, AI and robots are just newer versions of our old friend, productivity growth.
Productivity growth is the reason why most people do not have to work on farms growing our food. Productivity in agriculture has exploded over the last two centuries so that we can feed our population and even export food, with less than 2.0 percent of our workforce working in agriculture.
There are similar stories in other sectors. Productivity growth has radically reduced the need for workers in most sectors. It is why manufacturing now employs just over 8.3 percent of the workforce. (Yes, the trade deficit also reduces manufacturing employment, but even if we increase the figure by 20 percent, assuming something close to balanced trade, that still only gets us to 10.0 percent.)
Anyhow, we should not think of the technologies coming on the horizon as alien creatures. They are like the steam engine, electricity, the computer — new technologies that allow us to produce more with fewer labor hours.
Productivity growth has provided the basis for higher wages and living standards over time. It also can provide the basis for more leisure in the form of shorter workweeks, more vacations, and longer retirements. In the United States in the last four decades, we have taken the benefits of productivity growth (insofar as workers have seen them) primarily in the form of higher pay. In other countries, a much larger share of the benefits has been in the form of more leisure.
This has meant not only longer vacations (five or six weeks of paid vacation a year is now standard in Europe), but also paid family leave and paid sick days. Also, most other wealthy countries have lower ages at which workers qualify for Social Security benefits.
The UAW has put a 32-hour workweek on the table as one possible response to improvements in technology in the auto industry, specifically the shift to electric cars, which will require less labor. This is a great way of keeping workers employed as productivity improvements going forward allow us to produce more with less labor. If we can apply this formula more generally, then we can ensure that the benefits of adopting AI and the more widespread use of robots are widely shared.
In this context, it is worth debunking a foolish myth that enjoys great currency in elite circles. It is not technology that shifted income upward in the last half-century. It was our rules on technology that shifted income upward, most notably government-granted patent and copyright monopolies. There are alternative mechanisms for supporting innovation and creative work that would not lead to so much inequality.
CEO Pay is a Rip-off
The UAW has highlighted the issue of exploding CEO pay, pointing out that it has risen 40 percent over the last decade, with the CEO of GM now getting $27 million a year. This is a huge deal, and not just in a moral sense that we should be outraged about the inequality of CEOs getting paid 200 or 300 times as much as ordinary workers.
Unlike the case with ordinary workers, there is no real check on CEO pay. Ostensibly, corporate boards of directors are supposed to limit CEO pay to ensure that they are not ripping off the companies they work for. However, most directors don’t even see it as their job to limit CEO pay. Directors say that they see their job as serving top management. In that context, it is unsurprising that CEOs have seen their pay explode, going from 20 to 30 times the pay of ordinary workers to 200 to 300 times the pay of ordinary workers.
And, the issue is not just outlandish pay for the CEO. If the CEO is getting $27 million, the other top executives are likely getting $10 to $15 million, and third-tier executives are likely pocketing $2 million to $3 million. This also affects many structures outside the corporate sector. It is now common for presidents of universities and major foundations or charities to earn $2 to $3 million a year. Their second tier of management can pocket close to $1 million.
Imagine a world where CEOs still earn 20 to 30 times the compensation of ordinary employees, $2 million to $3 million a year. These pay structures would look very different. And, with less going to the top, there is more for everyone else. Suppose that in a world where the CEO of GM got $3 million and the pay of other top management was adjusted downward accordingly. This might free up around $200 million a year for ordinary workers. That would come to $4,000 annually for each of GM’s 50,000 UAW members. That doesn’t completely reverse forty years of stagnating wages, but it’s a good start.
Also, if the point is not obvious, there is nothing intrinsic to the market or capitalism that says CEO pay has to go through the roof. CEO pay has gone through the roof because of how we have structured the rules of corporate governance. Rules that gave shareholders (or anyone) better ability to contain CEO pay would result in a much different pay structure both at the top and in the economy as a whole.
Auto Industry Profits Provide Some Room for Higher Pay
It has been widely reported that GM made over $20 billion last year, with much of this being paid out to shareholders in the form of share buybacks or dividends. (For reasons I don’t understand, people get more upset about money paid out to shareholders as buybacks than dividends. I will add that Biden’s buyback tax is great news.) They jump from this number to saying that GM, and the other two auto giants, have plenty of money to pay their workers more.
Some important qualifications must be considered before giving workers all of GM’s profits. (That’s a joke, no one is proposing this.) First, GM’s net income, which is after-tax, was reported as $10.1 billion last year. Furthermore, this is a considerable jump from pre-pandemic levels when it was less than $7 billion a year.
In principle, it is net income that GM has available to finance its new investment. I said “in principle” because GM’s accountants tell us what GM’s net income is. There is reason to believe that it is fudged considerably, but the fact that the money they have left, after paying taxes and other expenses, is considerably less than gross profits is not disputable.
Anyhow, it seems that the profit figure reported for 2022 may have been somewhat inflated due to GM taking advantage of pandemic-related supply chain issues to raise margins. We may expect profits to return to something like pre-pandemic levels as supply conditions in the industry normalize.
The other fact that is not disputable is that GM does have to worry about its stock price. This is not because it matters much for its ongoing operations, whether it goes up or down by 10 percent or 20 percent, but an extraordinarily low stock price can leave the company vulnerable to a takeover. Paying out money to shareholders, as buybacks or dividends, helps to maintain the stock price.
Currently, GM’s market capitalization is $46.7 billion. Ford’s market cap is $50.5 billion. That means Elon Musk could buy both companies and still have half his fortune left to buy more social media companies and send people to Mars.
I couldn’t care less about the shareholders of these companies. But, if their stock prices fell sharply from current levels, these companies would be very vulnerable to takeovers. Union contracts stick in the event of a takeover, but contracts do expire. It would not be good for the UAW if some PE company committed to smashing the union were to take over GM and Ford. (We have seen this story many times.) For this reason, the UAW does have an interest in ensuring that these companies continue to maintain reasonable levels of profitability.
Just for some simple arithmetic, if GM raised pay for its 50,000 UAW members by an average of $10k each, that comes to $500 million a year. GM can surely afford that. An increase of $20k a year comes to $1 billion. Given that some of this will be passed on in higher prices, that still looks affordable. Getting much beyond that, I don’t know.
Inflated Stock Prices for Tesla and Other Wall Street Favorites Have a Cost
The flip side of the relatively low stock price for GM and Ford is the crazy price for Tesla. It now has a market cap close to $860 billion, almost 80 times its annual earnings. (GM’s price-to-earnings ratio is less than five.) This means that Elon Musk can raise capital at almost no cost by selling stock. That makes it difficult for other automakers to compete.
I haven’t tried to analyze Tesla’s stock price but I will say it looks high. (Brad DeLong did analyze it and came to this conclusion.) Anyhow, if the high price is just a case of irrational exuberance, the workers at the traditional car companies will pay a price.
We have seen this story many times in the past. My favorite example is when Time Warner, then the largest media company in the world, sold itself to AOL for AOL stock. AOL stock quickly plummeted, which means that the largest media company in the world essentially sold itself for nothing.
That made Steve Case and other big AOL shareholders incredibly rich but did nothing useful for the economy or Time Warner shareholders. These people now can enjoy lavish lifestyles – putting pressure on inflation – having essentially just pulled off an elaborate con. Anyhow, we do pay a price for irrational exuberance.
It Is Not an Issue of Electric vs. Gas-Powered Cars
Much of the media discussion has implied that UAW members stand to lose jobs from the Big Three’s conversion to electric cars. This is not true in any plausible universe. The Big Three currently have around 40 percent of the U.S. vehicle market, meaning the rest of the industry has around 60 percent.
The other manufacturers are rapidly adopting electric cars. The price of these cars is falling rapidly. Their ranges are improving and charging networks are being established nationwide. If the Big Three don’t also move rapidly to producing electric cars and compete in this market, their share of the total market is virtually certain to plummet.
Suppose the UAW were to block the Big Three’s shift to electric cars. If we can then envision a future ten or fifteen years out where their market share is down to 20 or 25 percent, is there any plausible story where that means more jobs, even if these are all gas-powered, than if their market share stays at 40 percent and half or more are electric? That seems a pretty hard story to tell.
In short, the Big Three have no choice but to move aggressively into producing electric vehicles. The UAW needs to fight to preserve as many jobs as possible, but blocking this shift is not a route that will do it.
The UAW and Big Three Are Still a Really Big Deal
The UAW contracts with the Big Three set a pattern for much of corporate America in the decades immediately following World War II. The auto industry is a much smaller part of the economy today than it was seventy-five years ago, and the Big Three have a much smaller share of the auto market. Nonetheless, the UAW’s negotiations are still drawing considerable attention. The outcome will likely have a major impact on the extent to which ordinary workers can share in the gains from productivity growth in the decades ahead.