Is Michigan Set To Follow Indiana In Becoming A Right-To-Work State ?

November 12th, 2012 by Trefis Team
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Recently Michigan voters rejected Proposal 2, a measure that would have prevented it from becoming a right-to-work (RTW) state. Right-to-work states allow the presence of unions but prevent workers from being forced to join them as a pre-requisite for employment as opposed to collective-bargaining states which force any worker to be a part of an established union as a pre-requisite for employment. [1]

Both of the approaches have their fair share of advantages and disadvantages. Liberals argue that such laws weaken the presence of unions which reduces their bargaining power against the powerful corporations. Moreover, the non-unionized workers benefit from the negotiations done by the unions without any payment of the union fees. On the other hand, conservatives argue that forcing workers to join a union as a pre-requisite 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 might be ideologically opposed.

Since the Republicans control both of the legislative chambers in Michigan, the introduction of a right-to-work law cannot be ruled out. This particularly has a big impact on the auto industry where unions have traditionally been an important part of Michigan’s history. Even the politically influential, the United Auto Workers (UAW) is headquartered in Detroit.

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Detroit Three Could Be More Competitive

What this law could potentially do for the Detroit Three is reduce their labor and pension costs and make them more competitive. A reason why General Motors (NYSE:GM) and Ford Motors (NYSE:F) have lower profitability as compared to Japanese, Korean and even German counterparts is because of their higher wage costs.

Although its difficult to quantify the extent to which the presence or absence of this law has an effect on the average wages, a study by Economic Policy Institute found out that the average worker in right-to-work states earn about $1500 (or about 3.2%of the average salaries) lower than the non right-to-state workers. [2] Furthermore, companies in RTW states could also benefit from a higher percentage of new hires (who have a lower wage compared to veterans) and lower pension costs (such as a 401k retirement account instead of a life-long pension)

See full analysis for General Motors

Currently, 23 states in the U.S. are RTW states including Indiana, which was the latest state to pass the right-to-work bill earlier in the year. Republican lawmakers cited the state’s inability to attract investment, particularly the one related to Volkswagen, as the major reason to pass the bill. Volkswagen finally chose Tennessee, a RTW state, as the destination for its billion dollar investment. The total labor cost per worker comes out to be around $38 for an hour for the automaker as compared to $58, which Ford currently incurs. [3]

We currently have a Trefis price estimate of $26.70 for General Motors’s stock, which is slightly higher than the current market price.

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Notes:
  1. Michigan Unions Lose and Right-to-Work Revival Looms, November 7, 2012, bloomberg.com [↩]
  2. Right-To-Work Law, Wikipedia [↩]
  3. VW Chops Labor Costs in U.S., May 23, 2011, wsj.com [↩]