David Friedman on $70 Per Hour UAW Labor Cost
David Friedman responds to Eric Boehlert's article "The Media Myth: Detroit's $70-an-hour Autoworker":
A good deal of Boehlert's indignation is based on the fact that labor costs as calculated include pension and medical benefits to retired workers. He regards this as obviously wrong, since the money isn't being paid to the current workers. But it isn't that simple. The cost of pensions is incurred when the worker is employed but paid when he retires. If labor costs only count what is currently paid to current workers, the cost of pensions will be left out, substantially understating both the benefit to the auto worker and the cost to the company.
Ideally, the calculation should be done using costs when incurred. But pension and medical costs are not known when they are incurred, since at that point the company does not know when the worker will retire, how long he will live thereafter or what his medical costs will be. So the choice is either to use a current estimate of the future cost of benefits to current employees or a current figure for current cost of benefits to past employees. Neither gives a reliable figure for the future cost currently being incurred and it is not obvious which is better.