Invidious comparisons

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If I'm so fond of workers taking haircuts, why not at AIG and the banks, huh?  huh? 

Ummm . . . .

For starters, I am not trying to punish the UAW.  I am thinking about how the company can be made profitable.  The company cannot, in my estimation, be made profitable with higher labor costs than the competitors. 

Labor costs are not the issue at banks, or AIG; balance sheet impairment is.  Labor costs are a much smaller portion of their financial burden than at an automaker.  Cutting their compensation will not return the balance sheets to full strength.

However, in fact, workers in the banking industry are taking a massive hit.  CEOs were forced to take huge paycuts, and if their bank is in trouble, they've already lost the greatest portion of their personal net wealth.  The banks are firing huge numbers of people, and the ones who are left can count on their paychecks looking pretty anaemic this year.  I know that many of you would like to see every single one of them have their paycheck reduced to that of a Nissan line worker, but it doesn't work that way.  The good people at those banks have better alternatives than being a Nissan line worker, and have usually invested substantial amounts of time and money in building human capital, rather than hitting the line after high school.  If you cap their pay there,  they will leave to pursue those other opportunities, leaving you a firm staffed with the rejects who can't work elsewhere.  Given that we are trying to save the banking industry, not destroy it, that's not a good idea.  A UAW worker, on the other hand, has alternatives that are generally much worse than the wages on a Nissan line.

But workers at banks face a stark choice that GM's line workers don't:  if they are not providing value to the firm in line with their salary, they will be asked to leave.  As hundreds of thousands of them have, or will be over the next few months.  That is precisely the deal that the UAW is resisting.

There's also the unfortunate fact that collective bargaining means collective wage reductions--what you gain on the swings, you lose on the roundabouts.  For AIG to actually go through and negotiate wage reductions with every executive, every secretary, every claims adjuster, would be too time consuming and expensive, in administrative labor, to make it (probably) worthwhile.  Not so with the UAW.

Finally, in the case of AIG, there's a misperception of where the costs lie.  There are very few industries where executive compensation makes up the bulk, or even a very noticeable chunk, of the wage bill--sole proprietorships, some tech companies, law firms and some financial firms, and a few consultancies.  In most places, however, the law of large numbers dictates that most of the wage bill is spent on the folks that all of us could agree are not wealthy by any stretch of the imagination.  That means that you can almost never achieve really major cost reductions by messing with the pay of the best compensated--it's the same reason that a decade of rising inequality still left the rich with barely a third of national income.  It may be wise to do so for justice reasons, or pour encourager les autres.  But it does not get us any further towards our goal of a healthy insurance company or auto manufacturer.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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