Detroit moves to a two-tier wage structure (can we call it a jobs package?)

by on September 15, 2011 at 9:35 am in Economics | Permalink

They are a cornerstone of Chrysler’s unlikely comeback: 900 employees turning out a Jeep Grand Cherokee sport utility vehicle every 48 seconds of the working day at an assembly plant here.

Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that.

…the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries.

Here is much more, interesting throughout, and I thank Miles Robinson for the pointer.  By the way:

Workers at Jefferson North said that the pay gap had not created visible tension.

See the article for some qualifiers on this front, but there is nothing unusual or shameful in using the prospect of promotion to induce discipline.

A simple question: is this a) macroeconomic good news, or b) macroeconomic bad news?  That it “has to happen” may be bad news, I mean “that it is happening,” given initial conditions.  I vote for a), good news, what do you vote for?  What are liquidity trap proponents supposed to answer?

steve September 15, 2011 at 9:43 am

To me, this gives the lie to any philosophical or moral pretense labor unions might maintain.

Ano September 15, 2011 at 11:24 am

But the labor unions agreed to this package. Labor unions: “higher compensation if we can get away with it. If not, not.”

NAME REDACTED September 15, 2011 at 2:15 pm

No, no. Its “higher compensation for those who are already members and voting, we don’t care anything abut the new folks.”

Urso September 15, 2011 at 3:04 pm

See, eg, the resolution to this summer’s NFL labor dispute.

EDG reppin' LBC September 18, 2011 at 11:53 am

Exactly. Sucks to be the new guy, or the retired guy!

Bill September 15, 2011 at 6:49 pm

Name, New hires join and vote.

The Anti-Gnostic September 15, 2011 at 9:59 am

If “sticky wages” are a problem, why aren’t sticky asset values a problem? Why can’t the guy whose wages get unstuck take shelter from the recession in falling prices? Why can’t the saver scoop up assets from the spendthrift and end the latter’s free ride? Or did the Keynesians get that old supply-side religion too?

Alex Godofsky September 15, 2011 at 11:00 am

Financial asset prices generally aren’t sticky.

The Anti-Gnostic September 15, 2011 at 11:13 am

Except when the government props them up.

Alex Godofsky September 15, 2011 at 11:26 am

That’s not what stickiness means.

The Anti-Gnostic September 15, 2011 at 11:40 am

I know it’s not what it “means.” But it’s what Keynesian policies do. Then Krugman wrings his hands and says we need to take out more loans.

efffem September 15, 2011 at 12:23 pm

What about the inflexibility of corporate profits? Why should labor have to bear the entire adjustment? Corporate profit levels are at record highs – i see two ways to fix unemployment: 1) wages fall making workers more attractive, 2) profit expectations fall making workers more attractive. Why is #1 the only thing considered by economists?

The Anti-Gnostic September 15, 2011 at 12:32 pm

effem – that would be the point in letting asset values fall. In short, America is becoming a country where the rich are not allowed to become poor.

mulp September 15, 2011 at 5:17 pm

“Except when the government props them up.”

Damn government propping up the amount millions of people owe on their loans – government should get out of the way and force those loan amounts down to market levels – rule of law be damned: contracts must be broken by government action without all the complexity and regulation and time delay of government run bankruptcy courts. Federal government takeover of bankruptcy is liberal overreach and is clearly an unconstitutional interference in State’s rights!

I love playing the conservative because their logic is so inconsistent, but so funny when made consistent.

dan1111 September 16, 2011 at 4:44 am

How about actually trying to understand conservative positions, rather than randomly applying words in mad-lib fashion and then claiming it proves that OTHERS don’t make sense?

Bill September 15, 2011 at 6:51 pm

Executive comp is sticky, and in fact, often rises, instead of falling, when the corporation loses money.

That’s real stickiness.

Mike September 17, 2011 at 2:06 am

The CEO doesn’t control the economy. He doesn’t control the industry or the competition.

A CEO’s **JOB** during an economic downturn is to cut expenses, and the largest component of expenses is LABOR.

CEO’s often work hardest when times are bad. According to economic research, they earn every dollar of their pay regardless of how ridiculous you (or I) think it is. Besides, they work for the shareholders – not you (unless you’re a shareholder). A CEO’s salary and other compensation is NONE OF YOUR BUSINESS, and none of mine.

Dave Schuler September 15, 2011 at 10:02 am

There has been a two-tier wage structure at the Detroit automakers for some time. The argument is over whether it should be eliminated or the gap between the tiers narrowed.

mulp September 15, 2011 at 5:45 pm

Obviously the economic boom resulting from the several decades of two tier wages demonstrates the value to lower wages because the economy in the US auto making heartland has just taken off as more and more workers have their wages slashed. Those millions of former GM workers now working at lower wages for the suppliers GM sold off are busy buying much higher end cars and trucks than the old overpaid union workers, which drives up GM sales as the lower tier workers stream into GM showrooms and lay down cash without any need for GM to come up with financing for bad credit risks who really can’t afford the debt.

James H September 15, 2011 at 10:04 am

No macroeconomic effects. On-the-line assembly workers at auto facilities are only hard-working, expensive, and visible ornaments of deep, global supply chains. There are only 125,400 jobs left in the final assembly process, according to the BLS–about half what it was a decade ago, and a good portion of those are probably not in Detroit 3 facilities.

Mike September 15, 2011 at 10:08 am

This is more evidence that prices are more flexible than Keynesian models assume, except the evidence is less deniable because it’s so obvious.

mulp September 15, 2011 at 5:48 pm

Right, as average wages fall, the prices of autos and trucks have declined relentlessly, so the lower paid workers can easily buy two cars on their reduced wages instead of the one car of the union workers…

Mike September 16, 2011 at 12:18 pm

Right, cuz everyone knows that workers in a Ferrari factory should be able to afford one (or two) Ferraris.

Mike Huben September 15, 2011 at 10:16 am

You can thank the government for auto industry bailouts that allowed Chrysler to survive to this day.

Nah, maybe the folks here won’t.

Cliff September 15, 2011 at 10:40 am

I won’t. Why would we want a failed company to survive? Sell the assets to a better company that will employ more workers.

Andrew' September 15, 2011 at 10:59 am

I blame the government for the bust that gave them the opportunity to pick and choose from the rubble.

Andrew' September 15, 2011 at 11:01 am

And Cliff is right. The only reason that disorderly bankruptcy causes value to evaporate is that the government can’t even do it’s basic responsibilities right.

mulp September 15, 2011 at 7:27 pm

Was Chrysler a failed company when Lee Iacocca was running it?

Were Chrysler assets used to employ more workers when sold to a better company, the German Daimler-Benz?

utiv September 15, 2011 at 11:03 am

You can thank the government for the green industry bailouts, er loans, that allowed Solyndra to survive to this day.

Andrew' September 15, 2011 at 11:25 am

‘Give a man a fire and he’s warm for the day. But set fire to him and he’s warm for the rest of his life.’

Bernard Guerrero September 15, 2011 at 11:42 am

+1

Mike September 15, 2011 at 1:24 pm

+2

NAME REDACTED September 15, 2011 at 2:16 pm

+3

ad*m September 15, 2011 at 3:21 pm

+4

James Oswald September 15, 2011 at 10:21 am

Good: Evidence for wage flexibility. It’s also support for Sumner’s idea that wage flexibility is about the already employed, not the new workers.

Noah Yetter September 15, 2011 at 10:43 am

More mutually beneficial trades are occurring = good news.

Ted Craig September 15, 2011 at 10:49 am

The UAW is pushing to end this system with the latest round of negotiations:
http://detnews.com/article/20110813/AUTO01/108130405/UAW-workers-seek-end-to-two-tier-wage-structure

The Anti-Gnostic September 15, 2011 at 11:32 am

They should push for a new Oldsmobile plant while they’re at it.

de.sch September 15, 2011 at 11:32 am

on the pro side: more flexibilty in the labor market, quicker firing but also quicker hiring, also more jobs
cons: firms will exploit the possibility of being able to pay less and will moove to a employment structure where they will maintain a “core-staff” that`s being payed better then their colleagues. ..so in the short run good for the macro. on the long(er) run: 14$*160hours/month=2240$/month pre-tax income. not much room for a decent 401k payment plan. that could lead to a rise of poverty for the elderly in the future. and who´s gonna come up for that? ..so bad for macro

Crat September 15, 2011 at 11:36 am

No trouble now because the $14/hour workers are happy to have job.

de.sch September 15, 2011 at 11:56 am

true that…. as long as this type of employment scheme remains temporarily.
in germany the govt enabled this type of payment by the end of 1990s. corporations lobbied heavily and with success to remain that system. although we´ve had a good development on the labor market since then, fact is it´s gonna cost us..once these low-salary wrokers retire the social safety programs will have to come up for these people.

RG September 15, 2011 at 12:05 pm

If the price of labor goes down across the board, shouldn’t the price of goods decrease to some extent? This could mitigate costs to the safety net.

de.sch September 15, 2011 at 12:34 pm

yes, it could. although i´m not sure to what extent. the wages in real terms are stagnant for two decades now over here. good thing is we also had low inflation in that period too. ..so it all could play out well. unless our politicians decide to save the euro by inducing a somewhat higher inflation target (say maybe 4-5% over the next 5 years or so?) ..that would be a problem. anywho i guess a two tier wage structure is not necesseraly a bad thing- but it might become one depending on the circumstances

Eddie September 15, 2011 at 12:00 pm

If the same car can be produced at 50% of the previous labor cost, then labor costs are too high.

It seems likely that ALL US employees are overpaid, and this is just the first compelling evidence of such.

That the unions are permitting this is just evidence of how they are only interesting in their own current employment situation, not those of their fellow workers. It’s just a case of “Get what you can now (until we’re retired), because the future is $14/hour labor.”

In any event, not a good sign for the future worker in the USA, but not altogether unexpected. There was only so long that people working at Taco Bell could be expected to make more than doctors in other developing countries.

Blooming Engineer September 15, 2011 at 1:42 pm

I don’t think you can draw conclusions about the value of US labor based on starting salaries for an assembler in a UAW shop – Wages across the world vary for a lot of reasons – usually based on the skills required and the mobility of the workers. In China you can easily find someone to insert part A in slot B for a few dollars a day – but you also have to house and feed them because the workers in these plants can’t afford to live on that wage. A skilled machinist that can program CNC machinery can make nearly what a similar employee in the US earn because those skills are relatively rare and very portable.
Doctors in developing countries are underpaid because they cannot easily transport those skills to another country due to licensing and training issues.
The problem for the UAW is that they are caught between maintaining support for the union – which requires a lot of workers to support it, and the reality that the higher skilled people can make more money in non-union plants while the unskilled labor will always have unemployed people willing to do the work for less. If the UAW maintains the two level wage scale they will quickly be voted out because nobody will see any need to pay union dues on top of market wages.

Alan September 15, 2011 at 4:37 pm

“It seems likely that ALL US employees are overpaid”

Does this include Bill O’Reilly, Tyler Cowen and Rick Perry?

Slocum September 15, 2011 at 12:06 pm

“There has been a two-tier wage structure at the Detroit automakers for some time. ”

Yes. And Caterpillar has had a two-tier structure for its UAW workforce since 1995:

http://www.npr.org/templates/story/story.php?storyId=11283371

prior_approval September 15, 2011 at 12:23 pm

‘I vote for a), good news, what do you vote for’
Coming from the person who posted an approving link to a Georgia program where the unemployed could work for free to help a corporation’s profits while not being paid wages for their labor, I’m anything but surprised.

Dan H. September 15, 2011 at 12:31 pm

Canada Safeway went to a two-tier structure a long time ago, when competition from big-box grocery stores like Superstore and Wal-Mart made them non-competitive. They had boxboys earning $15/hr in the 1980′s when other stores were paying minimum wage at $3.85 or maybe a dollar or two above that. This almost drove Safeway out of business until the union cut a deal to allow a two-tier structure, paying new hires substantially less.

fred September 15, 2011 at 12:40 pm

That’s a tough macro question! Quality manufacturing jobs move from supporting a ‘middle-class’ family to just keeping that family above the poverty level. It scares me.

Benny Lava September 15, 2011 at 12:59 pm

Oh no worries, because the poverty level is totally bunk because America’s poor aren’t dying of starvation. Remember you are only poor if you die of poverty. /s

The Anonymouse September 17, 2011 at 10:21 pm

The US ‘poor’ are the envy of the elites throughout history. If the worst we have to gripe about is that an autoworker’s poverty means obesity (too MUCH food) and not being able to upgrade his TV to a flatscreen megamodel, we are lucky indeed.

TMoney September 15, 2011 at 12:54 pm

Bad news, Henry Ford’s mass production model paid workers enough to buy the car they made. Try it on $14 /hr – you can’t – at least not and pay rent.

Benny Lava September 15, 2011 at 1:00 pm

But then again rent in Detroit is very low. Houses for a few hundred dollars and all that. Evidence then for a Detroit deflationary spiral?

TGGP September 15, 2011 at 10:16 pm
dan1111 September 16, 2011 at 4:56 am

“Ford astonished the world in 1914 by offering a $5 per day wage ($110 today)” http://en.wikipedia.org/wiki/Henry_ford

As opposed to now, when those poor workers only make $112 a day.

dan1111 September 16, 2011 at 5:01 am

Also, Ford’s employees worked six days a week, and half their pay was a bonus that they only received if they did not drink, did not gamble, and their wives did not work.

figleaf September 15, 2011 at 1:11 pm

On the bright side, it sort of makes sense to take a $14/hr job in Detroit, Flint, or other former auto and steel towns in Michigan. Unlike San Francisco or New York, say, where it would mean basically having to live in cardboard boxes (or in Seattle where it would mean you had to live at least an hour out of town) real estate in those towns is low enough that you can buy a house (and possible a fixer cathedral, hotel, or office building!) for less than you’d pay for a down payment elsewhere.

The big difference, I think, is that Michigan has been in decline for so long there really isn’t the same underwater mortgage problem there is in a lot of other places: in terms of sticky wages, if you can’t afford to sell your underwater house you can’t afford to take a $14/hr job either.

figleaf

Benny Lava September 15, 2011 at 1:28 pm

KInda makes you think about purchasing power and how the middle class is defined. 14/hr could still be middle class in a place like Detroit where houses can be found for a few hundred dollars, but no San Francisco where it wouldn’t even buy you a small condo in the ghetto.

http://www.altisourcehomes.com/Residential/Auction/000100377829TRNL4/9044/Stout-St/Detroit/MI/48228/reo-properties/property-Offer.htm?propDetailsBySearch=Y

2 bedroom 1 bath in Detroit, list price is $250.00. Sure it needs work, but still…

Ted Craig September 15, 2011 at 1:52 pm

These people don’t live in Detroit. They live in the suburbs, where houses still cost more than pocket change.
And yes, homes in the Detroit area are underwater. No offense to either of you, but the level of ignorance concerning Metro Detroit never ceases to amaze me.

Benny Lava September 15, 2011 at 3:20 pm

1. The Jefferson North assembly plant is in Detroit. Even if the employees lived outside the city limits houses still go for pocket change, comparatively:

Dearborn Heights, 26k http://www.altisourcehomes.com/Residential/Auction/000706162427AUCN1/4901/Ziegler/Dearborn-Heights/MI/48125/reo-properties/property-Bid.htm

Garbage City – I mean Garden City, 27k http://www.altisourcehomes.com/Residential/Auction/00038791232TRNL2/33240/Marquette-Street/Garden-City/MI/48135/reo-properties/property-Offer.htm

Your level of ignorance concerning metro Detroit is truly breathtaking to behold.

Benny Lava September 15, 2011 at 3:27 pm
Ted Craig September 16, 2011 at 9:13 am

Benny, I live in Metro Detroit. Do you? $65K for a house in St. Clair Shores is still more than pocket change.

Ted Craig September 16, 2011 at 9:29 am

And those are all REOs.

Jan September 15, 2011 at 10:51 pm

There actually is a huge underwater mortgage problem in the Detroit area. These fire sale home prices might be desirable for people from the coasts, but they aren’t moving to Michigan for a job. In fact, many of the people taking these lower paying UAW jobs already have mortgages on homes in the suburbs that they bought for way more than the famous $8,000 house in Detroit, where few people looking to start a family would even consider living.

The cost of living in Detroit overall is still well above places like Dallas, Charlotte and Des Moines. On balance, $14/hr is really not a middle class wage for people with families. These are some of the folks who can’t get out of their mortgage and move to North Dakota to drive a truck. Median incomes, I’ll see you at the bottom.

Also, Michigan never had much steel industry, and certainly nothing close to the number of steel towns in Pennsylvania and Ohio.

Benny Lava September 16, 2011 at 7:24 am

At one point it did. In 1925 Detroit’s steel production was third in the nation behind only Pittsburg and Gary.

Jimbino September 15, 2011 at 1:36 pm

It would be a great idea to set up an assembly plant across the street and lure away those $14 employees, once they get trained by the $28 employees, for $15 per hour.

Rahul September 15, 2011 at 2:27 pm

So, what prevents Chrysler from just firing all the union workers? Fear of a strike? Isn’t there enough trained labor elsewhere that they could hire? Or are there Government Regulations preventing the firing of all $28/hr workers.

Matt September 15, 2011 at 4:34 pm
o. nate September 15, 2011 at 2:27 pm

It’s $14 an hour + full medical benefits + 4 weeks paid time off + $2000/yr company 401k contribution. Total package worth considerably more than a $14/hr temp job with no benefits.

Bill September 15, 2011 at 6:54 pm

Are you sure about 4 weeks time off for new hire, and a $20k 401lk contribution.
That sounds made up.

o. nate September 16, 2011 at 11:32 am

I’m not saying that’s what a new hire gets, that’s the maximum. I don’t know exactly what the new hire gets, but presumably it includes at least the medical benefits and some paid time off, which still is an improvement over a $14/hr temp job.

Komori September 16, 2011 at 11:37 am

Not sure about the 401(K) contribution, but the 4 weeks is mentioned in the linked article (and contrasted to the higher tier employee’s 5 weeks).

stalin September 15, 2011 at 2:50 pm

Care to document that, o. nate? The 401K does add a $1/hr if you can afford it and can wait. But I’ll bet there is a medical coverage deduction and co-pays when you use it. 4 weeks time off, yeah eventually(10-15yrs) but is is probably 2 weeks the first year, 3 after 5.

o. nate September 15, 2011 at 4:17 pm

Well, I’m taking the most optimistic reading of the specifics that were mentioned in that NY Times article. It’s true there probably are some strings attached, but in any case it’s still better than just $14/hr with no benefits.

Tim September 15, 2011 at 3:20 pm

How much do we the taxpayers pay to subsidize those $14/hour wages? Do we still have to pay welfare? Medicaid? Texas has had some of the largest growth in the nation and some of the highest costs to taxpayers because those jobs pay so poorly.

Alan September 15, 2011 at 4:40 pm

The ideal wage rate is the rate at which illegal immigrants decide it is no longer worth their trouble to get in. Two birds, one stone.

Eric September 15, 2011 at 11:50 pm

What are these workers truly worth to the company-essentially their VMP (sorry to digress to micro everyone). Once the cost of the worker exceeds their VMP the company will likely not hire them. In our globalized world that VMP has gone down significantly because many of these jobs can be perfectly substituted by foreign labor. If the company is forced to pay higher wages they will a) downsize, or b) offshore the job, or c) go out of business. The only intervention possible for the worker is to increase their VMP through training, education, experience, and being the best employee possible. Or they could start their own business and find out what their VMP truly is.

KRG September 16, 2011 at 2:02 am

The cut is bad news, hands down:

Lets say it’s 1000 workers, one car/minute, and $15/hour ($30K/year) and $30/hour ($60K/year)
$15*1000/30=$500
$30*1000/30=$1000
MSRP on a Grand Cherokee is $27000, so that represents a price difference of less than 2%.

But, for a family of 4, $30K/year is only about $8K over the poverty line, $60K/year is $38K over the poverty line. That’s a 475% increase in disposable income for that 2% swing.
(Even more notably- that swing explicitly represents enough for that family to actually buy one of the cars it produces; the $15/hour folks don’t even meet the basic Fordism test (apocryphal or not) here, once you factor in basic living costs.)

And note that all of the rounding I did there made labor even more expensive, but we still see only a 2% cost increase that buys nearly 5x as much purchasing power to motivate more production, rendering that small increase completely negligible.

Alan September 16, 2011 at 2:45 am

Thank you for that calculation. A lot of the enthusiasm for reducing wages is based on the knowledge that keeping employees just above the poverty line keeps them tired and docile. As for suggesting that the 2% increase in price might be beneficial for the community at large – What are ya, some kinda commie? Why should a car company be responsible for stimulating the econmy? If everyone tramples on the person next below them, everyone goes up except the bottom tier, who need the spur of their poverty.

Ted Craig September 16, 2011 at 9:17 am

That’s MSRP. The real action is in incentives and fleet sales. Lower labor costs reduce both, which adds to the bottom line in numerous ways.

lbc September 16, 2011 at 6:05 pm

rich vs poor is dead
welcome to old vs young

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