Saturday, September 29, 2007

Job Security? Not Really, Not In the Long Run

From "The UAW's Awakening" in today's Wall Street Journal:

"The problem with unions is not all that dissimilar to that posed by entrenched management: Once they win comfortable contracts, they often become impediments to the kind of innovation and flexibility essential to success in today's economy. So in the name of "job security," they undermine a company's -- or a nation's -- competitiveness. The result, over time, is less job security for everyone, especially the union workforce. There's no better example of this than GM, where the UAW now represents about 74,000 hourly workers, compared to 246,000 in 1994. Some security."


This is classic textbook economics, paraphrased from Gwartney and Stroup:

For a time, unionized workers enjoy higher wages and job security. In the long run, however, investment will move away from firms with low profitability (Ford and GM). To the extent that the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan) and away from unionized firms. As a result, the growth of both productivity and employment, as well as market share, will tend to lag in the unionzed sector.

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations. Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run. The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.


18 Comments:

At 9/29/2007 9:34 AM, Anonymous bob wright said...

So the pertinent question seems to be how to impose this discipline on government, it's employees and the unions that represent them.

 
At 9/29/2007 10:00 AM, Blogger Walt G. said...

The popular opinion seems to be that higher wages always equals lower profitabilty. That's not necessarily the case. If you don't believe that, if you ever need brain surgery, put an ad in the paper for whomever will do it the cheapest. Sometimes you get what you pay for.

 
At 9/29/2007 10:14 AM, Blogger Walt G. said...

A lot of people don't realize that Japanese companies think long term. They make decisions thinking 10 or 20 years away.

The U.S. auto companies make decisions for the next quarter or year, so it's difficult to blame the unions for short-sightedness when they are dealing with that mind-set.

If someone has a subscription to the Wall Street Journal, here’s a link to a summary of the new UAW/GM contract.

http://online.wsj.com/public/resources/documents/WSJ-GM_UAW20070928_terms.pdf

 
At 9/29/2007 10:43 AM, Anonymous bob wright said...

Walt G:

You've hit on an important topic: Merit Pay.

Not all brain surgeons command top price, but all union members are paid the same - regardless of merit. Only the best brain surgeon gets the best pay. Average brain surgeons receive average pay.

There is a big difference here - me thinks you are comparing apples and oranges.

It would appear that you are suggesting that union members no longer be paid the same as the person next to them on the line.

 
At 9/29/2007 12:02 PM, Blogger holeydonut said...

Popular opinion is that extremely high wages in comparison to equivalent work output of other firms always equals lower
profitability.

GM cannot charge more per vehicle because it pays its workers a premium.

GM cannot pay a very motivated and talented person who demonstrates strong work ethic any differently than someone who does the same task but routinely just watches TV.

In GM's case it often times pays a whole bunch for not much of anything.

And yes, the Japanese automakers think long term. This is why they work damn hard to make sure no UAW union exists in their North American operations.

Unions by themselves can exist to where they do not drag their employer into a much if inefficiency. Korea has some extremely powerful labor unions and Hyundai/Kia deal with them all the time. And yet, they are still profitable.

It is not that all unions are bad. It is that the presence of the UAW and the CAW is bad for GM, Ford, and Chrysler. Any Union that negotiates that workers be compensated for getting dressed in the morning is adding cost without adding value to the automaker.

 
At 9/29/2007 12:51 PM, Blogger Walt G. said...

holeydonut said: "In GM's case it often times pays a whole bunch for not much of anything."

That should never actually happen. A lot of times uninformed people see workers sitting around and not doing anything at the moment, but the equipment should absolutely be running at that time. At our plant, a press that strokes 40 times-a-minute creating a $100 part results in $4000 per-minute downtime costs or $240,000 per-hour. How would you distribute your resources from the following choices: a) have 3 properly trained skilled-trades’ workers sitting next to the machine doing nothing at $30-per-hour each, OR b) have them actively involved in another project with a legitimate five-minute response time?

We have sophisticated software and a database connected to each press that tracks and records each second of downtime and the corresponding response time. Each week a committee pours over the results from the prior week’s printout for continuous improvement. Every time we get a new manager, he or she usually opts for “b” because it appears bad to have people sitting around, but usually in a short period of time they opt for “a” to save costs. We’ve tried: it’s impossible to get full-utilization and instant response. Like everything else in life, there’s a trade-off or balancing-act. You can pay a lot of skilled trades’ workers with $20,000. Perceptions are not always reality. Can you think of a choice “c.”? If it were your money, what would you do? We can always use new ideas for improving our processes.

 
At 9/29/2007 12:56 PM, Anonymous Anonymous said...

First of all, Walt, assembling cars is not brain surgery. Been there.

I had a chance to observe a UAW/GM plant when i was a systems engineer installing an automated system. First observation was that not one of the UAW people was younger than about 45 years.

That's old enough to have grown kids out in the workfoce. So, where are their sons and daughters working? Not at GM in their fathers' cushy union jobs.

 
At 9/29/2007 1:13 PM, Blogger Walt G. said...

I was not implying car assembly was brain surgery: I was comparing two brain surgeons with each other.

And, yes, I am saying merit pay should be an option (I know that's not the union way). The union should demand of its employees that they acquire the skill-set to be the best workers in the world. Management should provide the training to their employees that Toyota and Nissan supply to their employees (GM < 8 hours-per year, Toyota > 80 hours-per-year.

The merit would be if you do not take the training and improve your potential worth to the company and the union, you don't work there any longer. The judgment would have to be impartial, and maybe from a third party. Sort of like non-renewable tenure for a professor.

The higher wages can be competitive and justified if they are cost effective and raise efficiency. We have to work smarter, but not necessarily cheaper or even harder.

 
At 9/29/2007 1:31 PM, Blogger holeydonut said...

Walt - you act as if you've never walked through a UAW plant. But, I'm sure you have so I'm rather puzzled. I don't care if it's 1 person out of a hundred that abuses the good-faithed efforts of the majority. But with the UAW you cannot punish that 1 person for overt apathy.

There are many hard working people too - but none of my beef is against hard working people. My beef is with the UAW protecting the lazy under the guise of "solidarity."

You can find people talking on cell phones while on the line... that puzzles me greatly.

You find skills trade guys who are paid to make sure tooling is operating well - but they are often just sleeping for many hours. So in your example - I would imagine that (a) and (b) do stand to be optimized based on a given scenario. Maybe job extreme job specialization isn't the best approach since it limits your solutions to (a) and (b).

Sometimes skilled workers will sit around watching TV - and about 2 minutes before their shift is up they will call for maintenance on some piece of tooling. Then they keep on watching TV. 30 minutes later they clock out and book some OT.



It's also very peculiar the things the UAW claims as initiatives that they are responsible for - and they go so far as to believe that these improvements would have been impossible without the UAW.

If you've ever had to go into a plant and hear about these PQI initiatives - you'll find that room full of UAW guys spouting guffaws and having a grand old time. They come out of there with "initiatives" and then go home. Don't get me wrong, they claim PQI savings in the long run - the UAW even has the arrogance to announce on their website:

"We believe it is no coincidence that sustained improvement in vehicle quality has taken place in the years following a UAW-negotiated commitment to directly involve workers in quality initiatives."

The UAW doesn't result in improved quality - since the non-UAW competition accomplishes the same. All firms regardless of a union can find quality and efficiency improvements... and many PQI saving are just addressing some seriously horrible problems that existed int he 80s.

The UAW also claims that they are key partners in the HPV improvement of the domestic automakers. Yeah, you think so? Maybe it's because the UAW represents the workers. If the UAW didn't exist; then GM would simply claim that its workers have helped to achieve an HPV improvement.

The 07 Harbour Report (for 2006 calendar year) showed that Ford actually deteriorated it's HPV since 2002. I would imagine that the UAW doesn't claim any responsibility for that - but they do claim the great improvements at GM. The Harbour report does not pick up all Mexico powertrain and assembly plants.

But, it still remains that GM pays roughly $75 / labor hour versus Toyota's $50... so at a bare minimum I would expect some agreement that your brain surgery analogy is misplaced because at a bare minimum it should be that the workers at either UAW or Non-UAW plant are creating the same value and quality. Except at 30 HPV this is $750 per vehicle that cannot be passed to customers.

 
At 9/29/2007 2:17 PM, Blogger Walt G. said...

GM's wages and Toyota’s are very similar. Labor cost differentials are mostly from legacy. We addressed a ton of that with our new agreement. We recognize our competitive gaps.

Yes, we optimize, but we still have increased response times. Sometimes shifting one person out of 20 for a month costs over $100,000, this is statistically proven. We are data-driven.

We are not digging ditches here. Some of this equipment is as complex as a space shuttle. We have trouble taking an electrician from one press or robot to the next because this equipment is so specialized. In that case, how can you cross-train among trades when you can’t even train within a trade? Remember: for every person being trained, we need a replacement from somewhere that does not exist. We are still owed contractual training for employees where we combined some skilled trades over 12 years ago. GM has paid for the training five or six times, but never released the employee to go.

Improvement can always be made in processes, but implying that all UAW workers are lazy hurts your credibility and makes it sound as if you have an ax to grind. As I mentioned before, most of our vehement critics hire into GM when given the chance.

I’ve been in GM plants for over 34 years. By the way, how old are you?

 
At 9/29/2007 3:56 PM, Blogger holeydonut said...

I chuckle at the notion that you feel I have an axe to grind. I'm not old enough to have a grudge against GM or the UAW. You make it seem as if it was difficult for me to get into the car business. I'm sure you're probably holding a notion in your head right now that I'm too young and green to actually know the business. You're entitled to your opinions.

Walt, I'm 27. I am young enough to realize that this is the 21 century and not some legacy of the 20th pushing stubbornly forward. Instead of assuming Detroit represents the norm; I've gone out and seen what the norm is to compare to Detroit. What I see is a dying group of carmakers thinking the world revolves around them when in actuality there is a nation that largley doesn't care.

By and large most Americans feel the UAW is comprised of some lazy individuals. Not All - just some. There are marketing studies that show that UAW sticker that is shown on vehicles is actually a deterrent to American car buyers because they mentally equate the UAW to poor quality and reliability.

This is usually mixed in with the noting that American carmakers in general are incapable of producing a quality product - so the inefficiency, apathy, and ineptitude extends through the management, engineers, and final assembly.

The world has passed by the stodgy old guard of Detroit. I like autos a great deal; and this is a pretty sad state of affairs that have led to where Detroit is at today.

In most industries, Americans have an interesting way of approaching business. They are brash, innovative, and trendy. Firms that realize that they may lose this edge either reclaim their ideals or fall by the wayside. Detroit Management can't do it alone when their labor relationship is so economically irrational.

Unfortunately, I've discovered that time for recovery may already be gone for Detroit. When firms that originally made goods in the USA cannot fix their labor and material costs they usually just stop making product in the USA. And some negotiated to guarantee investment which would keep costs high. This is just another nail in the coffin.

How many Americans were sad when Zenith stopped making TVs; or when Levi Strauss stopped making Jeans in the USA; or when Panasonic got bought out by Matsushita? Did the world end when that happened? No. Every single time the world has continued and hasn't missed those companies one bit.

It is not an issue of tweaking stuff to close competitive gaps. It is a notion of things are totally wrong and Detroit is too stubborn to fix it because they refuse to accept the idea that there is a large problem.

Lazy workers are the tip of the iceberg - but this is the tip we see and for me, it gets the blame. It embodies the bigger problem lurking underneath. Irrational employer/employee relations make up the dangerous portion of the pie. But alas, for Detroit Auto - they see the tip of the iceberg but they don't even want to aknowledge it.

Professor Perry here keeps on pointing out that the free market in America and most of the Developed world sorts out inefficiencies. The free market will sort out GM, chrysler, and Ford soon enough.

This is very apparent. GM's market share continues to decline - and if you strip out fleet sales it'd be an even steeper decay. Ford's, if not for their strong International presence would likely be out of business. Chrysler builds arguably the cheapest interiors this side of Yugo because their cost structure is so bad.

And customers know it. Which - at the end of the day - is all that matters because public perception remains apathetic to a Detroit turnaround. Customers dislike unions, and customers dislike poor-grade vehicles. It may be logically wrong, but it happens anyway. Customers equate American Autos to low value. I hope you don't believe that the millions of customers who dislike Detroit also have an axe to grind.

When was the last time Toyota went out of its way to advertise that Corollas and Tacomas are Union Made? The UAW likes to tell people this - but even Toyota.com doesn't bring it up and you'll never find the "UAW: Assembled with Pride" sticker on a Corolla. It doesn't matter if the vast majority of individuals had pride or not; it's that UAW acronym that is scary.

 
At 9/29/2007 4:36 PM, Blogger Walt G. said...

Holeydonut,

I appreciate your views. It's impossible to argue with yourself and increase your knowledge. Opposing views are necessary. I knew your age from your profile and also your MBA background. You present yourself quite well.

I was serious about ideas concerning skilled-trades utilization because that’s one of the joint committees I’m on. We lost 10,200 years of skilled-trade knowledge at our location due to the buyout in addition to not replacing skilled-trade coverage one-for-one. Our response rate is up 25% and our diagnostic rate is up 100% the first nine months of this year. We are back on the bottom side of the knowledge curve of learning the “tricks of the trade.” Those spaceships don’t fix themselves. Well, sometimes they do, but we don’t know how! New ideas are always helpful, and those of us too close don’t always see obvious answers.

Sadly, you’re right, we have some bad apples and we have to deal with them. Most people, however, just need good leadership and direction. We are getting better, but we still have a long way to go to be competitive with transplants. In a lot of ways we are like a fifty-year-old boxer in the ring with a 30-year-old, so we will have to try a lot harder if we hope to win. Whether we like it or not, we carry a lot of baggage (legacy). Throw half-a-million retirees on Toyota and watch their labor costs rise, too.

Don’t give up on us yet. Make sure that your perception of our vehicles is really true. We don’t make them like we did in the ‘80s anymore. Some of our cars out there now are really nice. Although I doubt you will see it on this blog, Buick tied Lexus for customer satisfaction just this year. Customers were just as satisfied with the reliability of their 2004 Buicks as customers who purchased 2004 Lexus. That phenomenal!

Again, thanks for the intellectual discourse. Group-think does not usually solve most problems.

 
At 9/30/2007 7:42 AM, Blogger juandos said...

'My beef is with the UAW protecting the lazy under the guise of "solidarity."'...

Hmmm, I think its called a contract that the union has with its members... Right or wrong that particular contract clause needs to be upheld until adults can come to a compromise on it...

"Sometimes skilled workers will sit around watching TV - and about 2 minutes before their shift is up they will call for maintenance on some piece of tooling. Then they keep on watching TV. 30 minutes later they clock out and book some OT"...

Well this is hardly the sole purview of the UAW...

I've seen this on a college campus, in hospitals, and I see it quite a lot in software shops and accounting cubicle farms too...

What's your point on this holeydonut?

BTW its interesting you should bring up the Harbour Report...

I found the following: The manufacturing productivity gap among North American automotive manufacturers continued to narrow as quality advances and more flexible labor agreements drove major improvements, according to The Harbour Report North America 2007, the annual study released May 31 by Harbour Consulting...

There was this also: The larger gap in financial performances of the Detroit-based and Japan-based automakers reflect domestic companies’ higher incentive costs, legacy costs and their slower response to shifts in consumer choices more than any large competitive disadvantage on their factory floors.

“Improving productivity in the face of lower production is a huge accomplishment, but none of the domestic manufacturers can afford to let up,” said Ron Harbour, president of Harbour Consulting. “General Motors essentially caught Toyota in vehicle assembly productivity. Considering that they will be building vehicles in 2007 with dramatically fewer hourly employees in the U.S., GM, Ford and Chrysler likely will reduce their hours per vehicle significantly.

 
At 9/30/2007 7:57 AM, Anonymous bob wright said...

I think a major component to this discussion is missing: the failure of management.

At the end of the day, it is management's responsibility to produce a car that people will buy.

Take for example the just-discontinued Pontiac GTO. It was management's decision to re badge a boring Australian car and market it as a high performance American muscle car - UGH!

Buick's quality matched that of Lexus in 2006 [if my recollection is correct]. If GM can replicate this in it's other brands, the perception of American metal should eventually change.

The question seems to be whether the American car companies can stay in business long enough to see the benefits of consumers' changed perception.

 
At 9/30/2007 10:02 AM, Blogger Walt G. said...

As I'm sure Professor Perry would point out, the best of all this is that the customer wins with better and cheaper cars.

All the cars are better than the supposedly "great old days." I remember when:

-Tires wore out every year
-Batteries lasted 2 or 3 years at most
-Anti-freeze was changed every two years
-Spark plugs were changed every year
-Cars were worn out at 100,000 miles

I am sure that most of you can think of many, many more improvements.

Buy what you want, but make sure your decision is based on facts and not on a perception from the past. Drive and compare all the cars’ prices and quality before you make your choice. You may be surprised; even if you're not, you will be a much savvier buyer. Let GM, the UAW, and the stockholders worry about profits. That’s not the car buyer’s problem.

 
At 9/30/2007 11:52 AM, Blogger holeydonut said...

juandos - my point of bringing up the inefficiencies is that unlike other employer/employee relationships, the UAW protects the workers who underperform because if 2 people are doing the same job, their performance needs to be common. One person cannot be evaluated, rewarded, treated, or scheduled any differently regardless of perforance output.

So, the least-common-denominator wins out and those who strive to succeed are often times relegated to under performing due to the guidelines of their job. Often times things are just a matter of semantics or interpretation.

For example - if I'm managing a line and it turns out that 15% of my workers routinely call in "sick" 20 minutes before the shift starts, then I need to schedule about 15% extra workers for a shift full knowing that I need to cover the "sick" people and 20 minutes of warning is not sufficient. Granted, people get sick all the time; but you can see a clear decrease of sick people near Christmas time.

What makes it worse is when stealing and threatening supervisors is allowed to slide by because of the red tape involved in resolving the problem. If someone loads something that is not his into a lunchbox; it could be argued he was using the lunchbox to transport it. You get the idea.

As is common with all things in life, the good things are easy to overlook when there are lots of bad things. I have no doubt that there are lots of good people in the UAW and working in Detroit Auto. But I also have no doubt that the current structure of the UAW and Detroit Auto relationships condones lots of bad apples and bad behavior.

Some labor unions don't seem to be so forgiving. I think most people here are familiar with how pro-sports players unions are set up. The agreements define a whole slew of benefits for their players and work very hard to ensure parity with the owners and players.

But if a player has a fair-market value of $50M he can get paid that regardless of seniority. The agreement between owners and players association simply defines a minimum payment or a maximum payment for players of certain seniority. If a player begins to under-perform or no longer adds value to the team, he or she gets cut. He or she is not re-instated by the players association. The players do have solidarity - but they all acknowledge that some are better (and thus more valuable) than others of the same role.

Of course, most people view pro sports is an outlier to the norm since so few people are represented. But as far as I know it is still okay to provide disparate treatment for different value of work output for employees in Educator Unions, Law Enforcement, or maybe you cut meat at Kroger's.

But for some reason in Detroit, a supervisor can't even give a good worker a free lunch coupon without risking getting in trouble.

 
At 9/30/2007 9:22 PM, Blogger juandos said...

O.K. now we are getting somewhere...

bob wright's comment, "I think a major component to this discussion is missing: the failure of management" was one that I wanted to make also but some people would see that as a cop-out...

I do like what I think is quite the pertinant comment by holeydoughnut, "So, the least-common-denominator wins out and those who strive to succeed are often times relegated to under performing due to the guidelines of their job. Often times things are just a matter of semantics or interpretation"...

Yet I have to wonder does that sort of problem with the more sophisticated equipment in today autoplants actually appear or is it something else but just looks like good, old time contractual constraints?

I don't know so this is a serious question...

holeydoughnut's comment on sick time though valid is I believe as bob wright put it, a management problem...

 
At 10/01/2007 8:39 AM, Blogger Walt G. said...

The new UAW/GM contract addresses absenteeism rather severely. It’s quite lengthy, but its essence is that attendance excuses are no longer a supervisor’s job. If an employee is absent, a paid day is automatically used—no questions asked. After 5 days' absence in a year, an employee is sent to an attendance review committee to determine cause with proper documentation.

Employees are either excused by the committee, which has trained counselors as members, or unexcused by the committee. Referral to appropriate programs is mandatory for employees with problems. Unexcused absences result in time off at step 1 to discharge at step 6.

No longer can a supervisor cover for an employee’s absence. In fact, they are not even allowed to ask why they were not at work—it’s personal now and the employee’s business. All absences after 5-per-year are handled by the Labor Relation’s Department and the attendance committee.

Additionally, all vacation days must be excused before the days are used, so additional excused absences of the unknown type are not allowed.

 

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