$70 per hour:  right or wrong?

Felix Salmon argues that this figure for GM's labor costs is deceptive.  Sort of, but it's actually quite apt at showing the core problem with GM.

Felix says that "the average GM assembly-line worker makes about $28 per hour in wages, and I can assure you that GM is not paying $42 an hour in health insurance and pension plan contributions. Rather, the $70 per hour figure (or $73 an hour, or whatever) is a ridiculous number obtained by adding up GM's total labor, health, and pension costs, and then dividing by the total number of hours worked. In other words, it includes all the healthcare and retirement costs of retired workers."

This is not quite right.  The reason that it is reasonable to include retirees in GM's labor costs is that the benefits paid to the retirees are still under negotiation by the union.  In other words, the price for employing the people who are still working is giving a bunch of stuff to people who used to work for you.

If I understand it correctly, and GM uses standard accounting principles, GM's pension payout  costs are only marginal contributors to the problem; the pension fund has to be advance funded, which means that most of the payout is covered by investment proceeds that are not accounted for as part of company profits.  Only where there are shortfalls due to investment losses or exceptionally long-lived retirees does GM kick in extra.

The real cost center is retiree health care, and as noted above, this is negotiated as part of the labor contract for the current workers.  Due, I'm told, to the UAW's slightly strange constitution, retirees have more voting power than current workers.  That's why GM's medical costs rose at such a staggering rate; they were sacred to the real power in the union.

So from the worker's point of view, it is true, they are not getting $70 an hour worth of value (unless they're very close to retirement).  They are making a large personal gift to the retirees in the union.  But from the company's point of view, giving all that health care to other people is indeed part of the cost of their compensation.  Likewise the "job bank" and other featherbedding provisions.

Now, you could argue that since the retiree cost is fixed, it shouldn't be calculated on an hourly basis.  But there are lots of other kinds of fringe benefits that exhibit declining cost to scale--health insurance, for example.  So I'm not sure that argument is quite right.

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