Auto worker benefits – long rising – begin to wane

Two labor strikes this fall have been short, but the outcome is still tough for auto workers: After years of rising pay and benefits, the tide has turned the other way.

The next generation of United Auto Workers will receive lower pay and benefits than their predecessors, judging by the contracts reached or ratified this week.

If there's a big pattern in the current round of auto-industry bargaining, that's it.

Officially, pay cuts aren't part of the deals. But the launch of a two-tier system, offering many new hires lower wages, raises the curtain on an era when overall pay will be lower.

In benefits, a new contract ratified by UAW workers this week allows General Motors to contribute to a cash-balance retirement plan for new entry-level workers, rather than providing a guaranteed pension.

Meanwhile, in deals cut this year and in 2005, union workers and retirees will be shouldering more of the rising costs for healthcare, and the companies less.

All this marks a major shift for a union that has often set a standard for organized labor nationwide. This time, too, the labor trend in Detroit could have spillover effects beyond the auto industry.

"The real focus here is to get a competitive structure" against nonunion rivals, by moving away from a defined-benefit model of compensation, says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "This may be a visible enough step where we can really see this begin to move into other parts of the economy."

Of course, the shift toward 401(k) plans and higher medical copayments by workers has been gathering force in America's private sector for years. But when the UAW migrates in that direction, Mr. Cole says, it's possible that other powerful unions – think teachers and government employees – may end up following.

In the case of other union workers, the pressure may not come from Toyota or Honda, but from budgetary pressures as state and local governments confront the same medical inflation that besets GM.

For now, what's clearest is that 2007 marks a transformational year for labor in the auto industry.

So far, the union has gone on strike briefly at GM and Chrysler, which means a similar walkout could happen at Ford as well. But deals have been reached quickly in all cases, providing significant reductions in labor costs. The picket lines at Chrysler lasted just seven hours on Wednesday.

Deal may shave $1,000 off a GM car

Not everything shifts in a single contract. But the accord at GM – the one contract where details have emerged – could save the company $1,000 per car, Cole estimates. That goes a long way toward closing the cost gap with Toyota.

The biggest issue is healthcare. The rising liability for retiree healthcare will be capped – as GM agreed to a one-time payment to create a union-administered trust fund for those costs. Chrysler reached a similar agreement for such a trust.

Also, new hires in GM's "noncore" jobs such as subassembly and handling materials will start at pay rates as low as $14 an hour. GM is expected to undertake a new round of worker buyouts, so that as much as one-third of its union workforce may be paid on this lower scale.

Finally, new workers will have cash-balance retirement accounts, not a traditional pension. That doesn't mean future workers will have a poorer retirement, but it does remove a system of company-guaranteed benefits. Company contributions will total 6.4 percent of employee wages, and the accounts will earn interest tied to US Treasury bonds, according to details posted on the UAW website.

A win-win for companies and union

Many analysts see the contract as a win for both the company and the union. By making GM more competitive, the deal should allow more jobs to stay in the US. And union bargainers extracted commitments by GM to invest in making new vehicles at many existing US plants.

Workers and retirees as well do face higher out-of-pocket healthcare costs than they did in 2003, thanks in part to union concessions made two years ago.

But after decades of guaranteed pay raises – and an escalation of benefits – the union this time was struggling just to hold on to what it had.

"We protected jobs, wages, and benefits for both active and retired General Motors workers," UAW president Ron Gettelfinger said in a statement after workers ratified the GM contract.

Even as 66 percent of GM workers approved the deal, many see it as a step backward. The website for Soldiers of Solidarity, which represents auto workers critical of union leadership, includes a posting about the GM contract headlined, "Ripping to shreds what workers built over 70 years."

The commentary argues that the deal will "begin to radically lower wages throughout the auto industry" and undercut union solidarity with new wage tiers.

Many union workers, at the very least, worry that the current round of bargaining could portend more cuts to come.

Rivals such as Toyota are now looking to pare their US labor costs by adopting wages based on local averages for manufacturing jobs, not higher-paid automotive jobs. Until recently, experts say, the UAW had helped to lift the pay of auto workers nationwide, as nonunion rivals were forced to offer relatively high pay to counter efforts by the union to organize foreign-owned factories. The new phase may involve falling labor costs for both union and nonunion jobs, these experts add.

Some skeptics say the latest labor deals won't be enough to allow Detroit's Big Three to compete effectively.

If true, that fact may guarantee that the pattern of givebacks in 2007 would persist.

"Eventually the production workers are going to have to accept lower pay than they have now," says Peter Morici, a University of Maryland economist. "Or there will be yet another tier created…. Or they won't be able to compete."

So, he says, "four years from now they'll end up going through it all again."

With a cost gap still separating the Big Three from foreign competitors, Mr. Morici says he's surprised that Chrysler didn't push harder for concessions. The company is in rougher shape than GM, and could have weathered a strike for some time, he says.

The terms of the Chrysler deal aren't known, but the seven-hour length of the strike suggests to Morici that Chrysler's owners didn't push hard enough.

Much is changing, however.

Union members will be well-paid for higher-skill jobs. But the healthcare trust, coupled with the replacement of older workers with younger ones at lower pay scales, represent a big shift for the UAW.

"The real benchmark today is not one ... of the Big Three," Cole says. "It's really the internationals that they're competing with."

The union doesn't like that, but it recognizes that fact. In bringing the union toward this step, Cole says that "Ron Gettelfinger really did quite remarkable job."