no third solution

Blogging about liberty, anarchy, economics and politics

Labor in the Auto Industry is Overpaid

December 21st, 2008

In Will the Auto Bailout Be Repaid? one commenter was very upset because I said that labor in the auto industry had been overpaid. I’m not picking favorites, notice that I accused all parties of having been overpaid. This is the result of a distorted market that allocates resources inefficiently. It rewards rent-seeking instead of value creation.

I’m not saying it was a conscious effort by Labor to rip people off, any more than it was a conscious effort by the contractors or the shareholders. It most likely wasn’t a conscious effort by any of the parties who benefited thereby.

As anecdotal evidence, I sometimes reference a $20,000 Christmas bonus at Chrysler, because I know people who received that amount in the early 1990s. I don’t know how representative that bonus was of their pool structure, but I was able to find some information on Ford and General motors with a quick Google search.

The bonuses referenced above, distributed as part of profit-sharing plans (and other perqs) may very well have been commensurate with the profit the Big Three was earning in the 1980s and 1990s.

Now, consider those bonuses in the 1980s and 1990s in another light:

The amount of money General Motors distributed in 1984 alone could’ve become $1B (at 5%) or $4B (at 11%). Had Ford retained the profit-sharing it distributed between 1983 and 1989, Ford woould currently be sitting on reserves of $5B (at 5%) or $13B (at 11%). They would have zero need for a taxpayer bailout.

But what if the profit was excessive? What if those companies weren’t really producing sustainable value?

I know, hindsight is 20/20. Nobody, including the employees, Labor at the time, had any way of really knowing this. So they took their share of those profits. I’m not at all suggesting that Labor should not share in the profits of the company. Of course Labor should be well-rewarded when the company is doing well. But labor should likewise suffer when the company is performing poorly: this means reduced hours, reduced wages, plant closings, line discontinuations, layoffs, etc.

To argue for the bailout, on personal and emotional grounds, is to suggest that labor should always be paid the same amount of money, even when they’re producing too many cars that nobody wants to buy, which is to say that this particular type of labor should be paid in excess of its worth, which is to say, it will be overpaid. But even a proper reading of the labor theory of value implies that value is not the same as cost.

There is simply no justification for maintainging stasis in the Auto Industry. There is no reason to believe that either the amount of vehicles they’re currently producing, the amount of resources they’re consuming, or the number of people currently employed, is now and forever will be the optimal allocation.

We’d be better off paying 1/2 of them to dig ditches, and paying the other 1/2 of them to fill those ditches back up. At least then, they wouldn’t be consuming massive amounts of scarce material resources that could more efficiently produce other, valuable goods and services.

no third solution

Blogging about liberty, anarchy, economics and politics