Explaining General Motors’ Bankruptcy: Did GM Give In To The United Auto Workers Too Much?

Before being bailed out by the government and derided as “government motors”, General Motors (GM) was once a proud symbol of American industry. It used to be one of the largest employers in the country and it was the first company to ever make more than one billion dollars in a single year. How does such an industrial powerhouse come crashing down by 2008?

One relevant factor is the company’s complex relationship with the United Auto Workers (UAW).

First, it is worth noting that the UAW and GM have agreed to some very Kafkaesque and costly working conditions. According to some estimates, the average wage (including benefits) of a typical UAW worker at a GM plant was $73 per hour compared to the $44 per hour that a typical counterpart makes at a Toyota plant in the U.S. Thus, by labor costs alone, GM was at a severe competitive disadvantage compared to its competitors.

But this is just the tip of the iceberg. Here are some examples of additional self-defeating relationships that GM had with the UAW:

• In 1984, GM created a “Jobs Bank”, where surplus workers, rather than getting laid off, would receive 95% of their full salaries and benefits while the company waited to reassign them to a different post. In theory, this was intended to be a work protection program where trained workers would wait temporarily until being transferred. In practice, “bankers” would remain in the bank for months, if not years, while they got paid to watch movies, play cards, darts, and just pass the time on a daily basis. More senior employees would pull strings to get “laid off” so they could replace a junior employee in the bank and finish their remaining few years “working” there before retiring with full benefits. Soon, the bank would contain thousands of employees at any given time. At one point, even an entire workforce from a factory in Oklahoma City sojourned in the Jobs Bank.

• In 1970, GM adopted the “thirty and out” rule, where workers could retire with full pensions after thirty years of work with GM. So, for example, an 18 year old who started with GM in the late 1970s could retire by the time he was 48 and begin receiving an annual pension of $37,500 for the rest of his life. This system soon proved unsustainable. As of 2008, nearly 4.6 retirees were collecting benefits for each active worker. In 2011, now that GM has shrunk, this ratio is nearly 10 retirees for each active worker. Today, General Motors still has an estimated unfunded pension liability of $25 billion.

• When Delphi—a domestic auto parts manufacturer that is also primarily unionized by the UAW—was nearing bankruptcy, the UAW pressured GM into continuing to purchase supplies from Delphi instead of from overseas manufacturers so as to keep them in business. Astoundingly, this led to a relationship where GM was purchasing spark plugs for $1.70 per unit even though they could acquire them for $1.05 per unit from China. Even more astoundingly, it cost Delphi $2.05 to manufacture each spark plug, so this was an ongoing lose-lose relationship.

• As with many unionized manufacturers, GM had a number of strict work rules and defined job categories, which restricted the kinds of activities employees were authorized to do. In practice, these rules led to egregious inefficiencies in the name of preserving union jobs. For example, an employee overseeing the flow of components on an assembly line would not be permitted to turn on a circuit breaker, if a breaker tripped in one of the assembly robots; he would have to wait for an authorized electrician to flip the switch. Of course, assembly lines could shut down while waiting for the electrician to arrive, costing the plant thousands of dollars per minute.

What explains why a corporation would ever agree to such measures? I will take that up in a future blog post.