Opinion: Auto unions’ wage increases might hobble companies as they enter a downturn

Opinion: Auto unions’ wage increases might hobble companies as they enter a downturn

Gus Carlson is a U.S.-based columnist for The Globe and Mail.

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An independent contractor hauls vehicles made at the Spring Hill General Motors manufacturing plant as union members picket at the GM engine plant in Spring Hill, Tennessee, on Oct. 30.SETH HERALD/Reuters

Auto workers doing high-fives about the huge pay increases extracted from the Big Three automakers in the United States and Canada over the past couple of weeks should enjoy their moment in the sun – it won’t last.

For workers and employers alike, the wage hikes – the largest in the industry in decades – come at a time when belt-tightening not bingeing is the catchphrase guiding the strategy of any industry sensitive to high interest rates, stubborn inflation and increasingly prudent consumer spending patterns, especially on big-ticket hard goods such as cars and trucks.

The auto industry ticks all those boxes. And while the auto workers’ euphoria isn’t quite a case of whistling past the graveyard yet, it tends to ignore the inevitable knock-on effects of such historically high labour costs in an economy already lurching toward recession: production cuts, reduced shifts and even layoffs.

Even in good times, there is no free lunch. Such cost increases can limit employers’ ability to invest and grow, drive research and development that is essential to global competitiveness, and innovate and expand to create new jobs and keep existing ones.

Rising labour costs must be paid by someone, and it’s usually the consuming public in the form of higher sticker prices. But if they’re not buying new vehicles, the costs need to be picked up somewhere else or things slow down. It’s nothing personal, as the finance people say, it’s just math.

The unions would say the difference should come out of corporate profits or, on a more personal level, from the hides of highly paid auto executives. They are quick to point out that even with these historic wage increases – roughly 10 per cent over the next 4½ years for average full-time U.S. auto workers – it is still a drop in the bucket compared with the compensation packages of senior leadership.

Under the new United Auto Workers agreement in the United States, full-time union workers will make between US$30 and US$42 an hour by 2028, or between US$60,000 and US$84,000 a year.

Canadian auto workers recently reached similarly sweet three-year deals with GM, Ford and Stellantis, the latter still pending ratification. They include base hourly wage increases of nearly 20 per cent for production and 25 per cent for skilled trades over the lifetime of the agreement, including 10 per cent in the first year. By the end of three years, a top-rated production assembler will be paid $44.52 an hour, plus a cost of living allowance; a journeyperson skilled trades worker will get $55.97 an hour, with cost of living. Pension plan improvements are also part of the deals.

As juicy as those increases may appear, there is no question they pale when compared with the compensation packages at the top. In 2022, GM CEO Mary Barra made almost US$29-million in total comp; Ford CEO James Farley made nearly US$21-million; and Carlos Tavares, CEO of Stellantis earned about US$25-million. It’s an effective talking point for the unions and a public relations Achilles’ heel for the companies.

But it’s an entirely apples-to-oranges comparison. The CEO is only one person, and the next-highest-paid top-level executives are but a handful. Their millions in pay is the real drop in the bucket. In contrast, because of the sheer number of auto workers, their new deals will cost each company more than US$1-billion a year, according to some analysts.

Moreover, whenever a deal such as this is struck, unions often feel emboldened to pursue a strategy of manifest destiny and set their sights on organizing open shops. Armed with these wins, the UAW is expected to target non-union U.S. operations of Toyota, Honda – and the perennial favourite target, Tesla.

Tesla founder and CEO Elon Musk has steadfastly rejected calls to unionize his work force of nearly 130,000 people. He says he compensates and treats his workers better than unionized shops and incentivizes them on the basis of merit, performance and market forces. Their fortunes and those of the company are intertwined – if they do better, the company does better, and vice versa.

But even Tesla, the 800-pound gorilla of the electric-vehicle world, is not immune to consumer sensitivity. It has had to cut prices on some models to address concerns in the marketplace about high costs and bring them more into line with the pricing of conventional gas-driven or hybrid vehicles.

If a unionization wave comes to Tesla, and the company has no choice but to raise salaries even when times are bad, the outcome will not be pretty.

Whether or not the unions’ wins over the automakers constitute a Pyrrhic victory for workers remains to be seen. One thing is for certain: The free market plays no favourites. While it’s true a rising tide lifts all boats, they all fall on the ebb.

Unfortunately, that ebb has begun, and the excitement of the newly flush auto workers may run hard aground sooner than expected.

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