Big Blow To Unionized Labor In Michigan Could Help Auto Makers

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A month after voters of Michigan had rejected Proposal 2, a measure that would have prevented it from becoming a right-to-work (RTW) state, Republicans have officially passed the legislation. Michigan now becomes the twenty-fourth state in the U.S. to become a RTW state. The outcome of the voting was never really in doubt since the Republicans control both of the legislative chambers of the state. Although four Republican state senators and six Republican state representatives had opposed the law siding with the Democrats. [1]

Michigan union workers enjoy one of the highest wages in the country. The Detroit Three have a significant presence in the state and have one of the highest labor wages compared to other automakers in the other states. But the chunk of investments by foreign automakers have been in RTW states: Volkswagen chose Tennessee, a RTW state, over Michigan as the destination for its billion dollar investment in 2011. The total labor cost per worker for the company was around $38 for an hour as compared to $58, which Ford Motors (NYSE:F) currently incurs. [2]

See our complete analysis for Ford Motors here

Besides a wage law, other factors such as standard of living, geographical positioning, economic environment etc, influence the hourly wages in a state. Although it’s hard to quantify the impact of such a law, the average worker in RTW states earn about $1500 (or about 3.2%of the average salaries) lower than the non-RTW workers. [3]

What is A Right-To-Work State ?

Right-to-work states allow the presence of unions but prevent workers from being forced to join them as a prerequisite for employment as opposed to collective-bargaining states, where its a compulsory employment prerequisite to be a part of an established union.

RTW states also discourage freeloading by employees who benefit from the negotiations done by the unions without paying any sort of a membership fees. In a collective bargaining state, any worker that benefits from the negotiations done by the unions has to compulsorily pay the membership fees to the unions. According to the liberals, RTW law considerably reduces the bargaining power of the unions which in turn lowers the wages.

Also, the conservatives argue that forcing workers to join a union as a prerequisite for employment violates the constitutional right to freedom of association. Moreover, the workers have to pay fees and dues related to union membership for services, to which they may be ideologically opposed.

Who Does It Affect ?

The bill affects all the unionized workers of Michigan. This also has a huge impact on the Michigan’s auto industry where unions have traditionally played an important role. In fact, the state has been the bastion of unions and such a move would have been unthinkable at one point of time.

How It Impacts Ford ?

Ford incurred about one third of its $122 billion in automotive costs on structural and warranty costs in 2011. Structural costs include labor costs, including their pension and health benefits, depreciation and amortization, advertising and sales promotion costs.

Ford doesn’t provide a further breakup of these costs, but the labor costs could account for more than half of this amount which translates to $20-25 billion. Thus, any improvement in the labor costs could directly contribute to the bottom line.

The automotive costs account for about 90% of the revenues. Currently, 41,000 of its hourly labor workers are part of Ford’s agreement with United Auto Workers. [4]

Similar effect on hourly wages can be expected by General Motors (NYSE:GM) and Chrysler.

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Notes:
  1. Michigan Lawmakers Approve Right-to-Work Bills, December 11, 2012, abcnews.com []
  2. VW Chops Labor Costs in U.S, May 23, 2011, wsj.com []
  3. Right-to-work law, wikipedia.com []
  4. Ford 10-k []
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  • commented 2 years ago
  • tags: TSLA F DAI GM TM HMC
  • It seems like everytime we talk about labor costs to the companies we only refer to the ones who do the actual work. How about mentioning the management wages which are totally out of sight. Millions of dollars a year per an emloyeein management and the management bonuses which at times are enough to build a new more efficient factory