The Concession Trap: Auto Worker Givebacks and Labor’s Future                                                        

By Simone Landon

In the early 1950s, then-president of General Motors Charles Wilson declared, “What’s good for the country is good for General Motors, and vice versa.” The point was the auto industry’s critical importance to the U.S. economy. But if the economy depended on auto, auto depended on its union workers. The gains made by auto workers set the tone for the rest of the U.S. labor movement.

A half-century later, the Big Three’s market share has fallen below 50 percent, and auto is no longer the vital sector it once was. But if GM’s role in the good of the U.S. economy has diminished, the United Auto Workers (UAW) still retains its prominence as a trendsetter for the labor movement. The most recent Big Three auto contracts, bargained last fall, may be the most concessionary yet for UAW members. The fallout will affect all U.S. workers, union and non-union, in auto and beyond.

The auto companies have long blamed their union workforce for their dwindling market share. They seized on labor costs as the source of their unprofitability — GM, Chrysler and Ford lost a combined $15 billion in 2007, and are bleeding much more in 2008.

Industry analysts and management assert the companies must cut these costs by up to 50 percent to remain competitive with foreign automakers with U.S. “transplants,” whose workers are not UAW members. The automakers publicly claim that compared to foreign automakers that have plants in the United States, they pay over $24 more per hour, broken down roughly into $7 in wages and $5 in health benefits for active workers, as well as $12 for retiree costs.

Seeking to further reduce these costs in the 2007 contract negotiations, the Big Three adopted a strategy of benefit cutbacks for retirees, attrition for active workers and distanced responsibility for future employees. GM spokesperson Dan Flores puts it bluntly: “We’re looking to bring our costs down in line with what Toyota is doing.”

In such evident distress, the Big Three positioned themselves in contract negotiations as helpless to do anything but demand far-reaching givebacks. The UAW did little to offer a contrary narrative.

Doing so required UAW members to accept concessions that made their wages and benefits look like those of non-union auto workers. Though givebacks have become customary for the UAW, the 2007 Big Three contracts were seen by many as a watershed in the erosion of good union jobs. The union reversed long-held positions, opening the door to drastic wage and benefit changes, including a new two-tier wage structure that creates a second-class workforce of new hires.

UAW spokespeople were not available to comment for this article.

UAW dissidents say wage concessions cannot solve the Big Three’s problems. Labor costs represent less than 10 percent of the average sales price of a new vehicle, according to industry sources. Moreover, say the dissidents, the Big Three’s problem is not price competitiveness, nor even quality — the U.S. automakers having largely closed quality gaps with Japanese companies. The core problem for the Big Three is their product mix. They became overwhelmingly reliant on selling SUVs and light trucks, vehicles that have suddenly become much less popular. Lower labor costs cannot change consumer demand patterns.

Wage Freeze

All Big Three auto workers face a wage freeze over the four-year life of the contracts adopted in 2007. They will also lose some of their Cost of Living Adjustments (COLA) — the money will instead be diverted to cover healthcare costs. COLA is not the same as a traditional raise — it simply bumps up workers’ hourly wages to compensate for inflation. No wage raises for four years and some diverted COLA money mean auto workers will have lower real buying power at the end of the contract.

To compensate for these losses, the UAW bargained four lump sum payments in each year of the contracts. At GM and Chrysler, workers received a $3,000 signing bonus and will get two 3 percent and one 4 percent lump sum payments based on hours worked. Ford workers also received $3,000 signing bonuses and will get 3 percent lump sums in the following years of the contract. The UAW estimates these cash payments could total over $13,000 — but base wages will remain unchanged.

Healthcare Burden Shift

The automakers came to the bargaining table determined to cut costs primarily by radically altering their contributions to current and future retiree healthcare. The Big Three owed upward of $116 billion combined in current and future retiree healthcare costs. Though the UAW had a 50-year staunch position that comprehensive healthcare was the companies’ responsibility, the new agreements allow the automakers to escape such responsibility by contributing to a union-administered healthcare trust fund.

Under Voluntary Employee Beneficiary Agreement (VEBA) arrangements, the employers will make a one-time contribution to a trust, and then walk away from funding retiree healthcare costs. VEBAs are a relief to the Big Three because the trust program “allows us to take this enormous obligation off our balance sheet, off our books,” Flores says.

The UAW has the option to combine the employers’ funds in the trust and administer them as it sees fit. However, the funds promised by the companies under the contracts match only 55 percent to 65 percent of their prior liabilities. According to the UAW’s figures, GM will front $29.9 billion (instead of its previously owed $47 billion), Chrysler $8.8 billion (of $16 billion) and Ford $13.2 billion (of $22 billion). The difference is supposed to come from earnings on investments by the trusts.

The trusts begin operating in 2010. On announcing the tentative VEBA deal with GM in September, UAW president Ron Gettelfinger claimed the VEBA would “secure the benefits of our retirees and every seniority employee” and remain solvent “for the next 80 years.”

“Healthcare is in a crisis in this country,” Gettelfinger said. “Our retirees will be protected under this VEBA.” But if healthcare costs rise and the seed money runs dry, or if investments turn sour, the burden of healthcare coverage will fall to the UAW and its members.

The VEBA arrangement also undercuts gains auto workers thought they had made by accepting previous concessions in exchange for commitments that the companies would continue to fund comprehensive healthcare. Under the terms of the new contracts, retirees who accepted COLA diversions and wage freezes in exchange for healthcare funding when they were active workers will see that money evaporate, as the Big Three renege on their funding obligations. They also face higher co-pays on prescriptions and medical care.

Three former UAW executive board members wrote a series of open letters to the GM bargaining committee to voice their concerns over the VEBA. Jerry Tucker, Paul Schrade and Warren Davis deemed it “irresponsible” to “shift the burden of risk to the retired workers and their families and release General Motors from its commitment to the full and perpetual coverage of healthcare for the workers who built the wealth of the corporation in the first place.”

Schrade, Tucker and Davis, and other critics, also raised concerns about the potential underfunding of the VEBAs, an issue that has become more acute since the contract ratifications. There has been speculation that the companies will not be able to meet their one-time payment commitments to the VEBAs. Ford’s VEBA will be half funded by Ford stock, meaning it could be cut in half if the company were to go bankrupt. Chrysler will pay only $7.1 billion cash, the rest coming as a stock debenture. GM tried to sell the UAW a $4.4 billion convertible bond to finance 15 percent of its VEBA, but dissident auto workers soon called that plan into question, asking for review by the Securities and Exchange Commission.

Schrade, Tucker and Davis pointed to problems with other VEBAs’ financing, citing the collapse of the UAW VEBA at Caterpillar as evidence of the risks of linking healthcare benefits to a trust: Retired Caterpillar workers “now have thousands of dollars in unanticipated out-of-pocket costs per year for reduced healthcare protection,” they wrote. UAW Caterpillar members have filed a lawsuit against the company over their lost healthcare money.

Solidarity Sacrificed

Perhaps the most far-reaching result of the 2007 contracts are provisions that bifurcate the workforce into higher-paid older employees and lower-paid new hires. The companies successfully bargained a wage scheme whereby new hires and some temps are paid considerably less than already-active workers and have a different benefits structure. New hires can expect a union job to look much like a non-union job.

GM’s Flores points to the UAW’s cooperation on two-tier. “The UAW looked at the reality of the marketplace,” he says. They decided “if we’re ever going to get the company to hire anyone again, we have to be willing to create jobs where they can pay a competitive wage.”

New hires at GM will start at $14 an hour — compared to a little over $28 per hour for their co-workers. Rather than have a traditional company-funded pension plan, GM agreed to contribute $1 per hour to a 401(k) fund that is tax-deductible for the company. New hires are not eligible for post-retirement healthcare under the contract. Wage raises for these workers will depend on the auto industry average, which includes non-union wages considerably below the UAW rates.

After the two-tier pattern was set at GM, Chrysler and Ford pushed through similar structures in their contracts. All of the companies’ new hires will earn $14 an hour. But at Chrysler and GM, second-tier workers can only be hired for “non-core” jobs, a negotiated category covering a vast array of work duties. The contracts define up to one third of assembly plant jobs as non-core. In the GM contract, non-core jobs include “truck driver, material handling, warehousing, kitting, sequencing, repacking, sub assembly, inspection, non-core stampings and machining.” At Chrysler, one machining and two axle plants as well as all transport workers were converted entirely to non-core status.

Ford managed to force the two-tier scheme for all job classifications. Up to 20 percent of Ford’s workforce can be second-tier. And with the two-tier structure in the door for non-core work at GM and Chrysler, critics worry it will only be a matter of time before the companies force its extension to all employees.

Prior to the reclassification, most production workers received the same pay and benefits regardless of their job labels. GM claims the reclassification with new pay scales is essential to keeping up with competitors. Flores says, “We modeled these non-core jobs after how the best in the industry, Toyota, is running their operations. If they’ve outsourced, we’re either going to have to outsource or keep [the jobs] inside and pay what they pay to outsource.”

Critics say the two-tier arrangement violates the solidarity doctrine at the heart of what it means to have a union. “It’s not hard to see where this is going,” asserts Sam Gindin, retired research director for the Canadian Auto Workers. The union will be weaker, as “the first thing new workers see and experience is union-company collaboration in making them second-class workers.” And with union benefits traded away, “forget organizing,” Gindin argues. “Why would anyone want to join a union proud of the fact that it may now have lower standards than non-union plants?”

The automakers now have a huge incentive to rid themselves of old employees in order to take on cheaper new hires. They will do so by offering buyouts — the working class equivalent of the severance package.

Ford managed to buy out more than 33,000 workers over the course of 2006 and 2007, giving it ample room to hire new workers on the lower wage tier.

GM has a much older workforce than Ford or Chrysler. More than 60 percent of GM’s current workforce will be eligible for retirement in the next five years, meaning the company may not have to offer many buyouts in order to increase its numbers of second-tier workers.

Real or Illusory?

The companies and the UAW framed the union’s concessions as part of a deal to obtain guaranteed investment and heightened job security for union members. After GM workers ratified their contract, Gettelfinger said, “We were able to achieve our goals. We protected jobs, wages and benefits for both active and retired General Motors workers — and we helped protect middle-class manufacturing jobs in communities throughout the United States.”

The UAW noted that the contract “brings unprecedented job security with company commitments to invest in new products for its existing U.S. facilities, as well as a moratorium on plant closings and outsourcing of work over the life of the agreement. The UAW also was able to secure a commitment to hire 3,000 temporary workers into full-time, traditional employment.”

The union echoed this position after ratification of the Chrysler and Ford contracts.

“With the support of our membership and local leadership,” said UAW Vice President General Holiefield, who heads the union’s Chrysler Department, “we have an agreement that secures jobs and wages and protects healthcare and pension benefits.” Chrysler agreed to a moratorium on outsourcing and plant closings over the life of the contract, but the deal exempts nine plants that Chrylser will likely close, eliminating 9,000 jobs.

Similarly, UAW Vice President Bob King, who heads the union’s National Ford Department, said, “We obtained solid commitments from the company to keep plants open and to invest in UAW members and union-made products here in the United States. That means job security for our members, which was a top priority for us.”

Ford agreed to bring in 1,500 currently outsourced jobs. However, the jobs brought back in will be paid on the lower tier.

That many saved jobs will be paid at a second-tier rate comparable to non-union wages undermines the purported gains of the contract, say critics. But even more serious, they say, is that the job security gains are in many ways illusory. The reality of job security depends, as the contract language states for all of the Big Three, on market conditions. If the market doesn’t pick up for Detroit’s products, workers may face additional threats to their jobs.

UAW Discontent

Considering the drastic nature of the contract changes, it’s no surprise that the Fall 2007 bargaining process did not run per the usual UAW pattern. Instead of setting up talks and knocking through the contracts one after the other, the companies met some resistance from the union, and the UAW leadership confronted dissent in the rank and file.

When the GM negotiations appeared deadlocked, the UAW called its first national strike against the company in 37 years. At the time, Gettelfinger insisted the bargaining impasse revolved around wages and job security, not the VEBA, which company and union negotiators had already agreed on. The strike was an uncommon show of force for the UAW, and negotiations quickly resumed. The union reached a tentative agreement with GM just two days after the strike began.

The task then became to sell the agreement to workers amidst loud opposition from dissident forces in the UAW.

Opposition was galvanized by the public stands of former UAW executive board members Schrade, Tucker and Davis, who urged union members to vote against the contract. They challenged the automaker’s commitment to stockholders over employees, and criticized the union for partnering with the company on VEBA. “The Big Three clamor to relieve themselves of the cost of retiree healthcare may be applauded by Wall Street and the investor class,” they wrote, “but unions have a different responsibility and a different constituency.”

Gettelfinger claimed the union’s national council of local presidents voted unanimously to recommend the tentative agreement to the membership. But Local 909 President Al Benchich, who works in GM’s Warren, Michigan, powertrain plant, insisted that he abstained. He, too, wrote an open letter to members, calling for a “no” vote on the contract. Benchich described the two-tier provisions as “chilling” and a “tremendous step backward.” He also criticized the VEBA as the wrong solution for union member healthcare.

The Chrysler contract faced even stronger opposition. As with GM, the UAW staged a brief strike during negotiations, this one lasting only six hours before a tentative agreement was announced. Though the UAW said the strike showed its potential muscle, it failed to boost worker morale.

Chrysler workers may have lost confidence in the contract due in part to the minority report of the chair of the UAW’s Chrysler negotiating committee, Local 1700 President Bill Parker. He turned the committee into a hung jury, refusing to vote to recommend ratification of a contract that had deeper concessions than at GM. Parker saw Chrysler’s agreement as even worse than GM’s because it lacked product commitments, reduced opportunities for seniority, and added costs for retirees until Chrysler had “caught down to the GM pattern.”

The pattern agreement held largely at Ford, too, but the Chrysler precedent of extracting even further concessions repeated. Unimpressed workers and retirees at Ford waged a “Vote It Down” campaign. In a letter to their coworkers, 44 Ford Dearborn Truck plant employees critiqued the union’s bargaining strategy: “They want to sell us a contract based on false promises of ‘job security.’ They want us to forget that this contract has concessions that will lead to a devastating drop in the standard of living for current autoworkers, future autoworkers, retirees and workers across the country.”

The GM contract passed with 65 percent, one of the smallest approval margins in recent history. The approval of the Chrysler contract was even slimmer, with 56 percent of production workers and only 51 percent of skilled trades workers voting in favor. The Chrysler “no” vote was the largest ever of any ratified contract at the Big Three. The Ford contract, the last bargained, received a considerably higher 79 percent approval vote.

Workers Continue to Pay

Workers in related auto sectors are already facing the repercussions of the 2007 Big Three contracts. The ripple effect for the auto parts industry has been more akin to a tidal wave of similar concessions.

Prior to 2007, UAW auto parts workers had already taken a huge hit when Delphi, GM’s main parts supplier, used bankruptcy as leverage to re-open the UAW contracts. With the contracts opened, GM and Delphi were able to secure tremendous buyouts of nearly one third of their workforce, cutting over 47,000 jobs. Delphi’s financial difficulties were a legacy of spinning off from GM in 1999. UAW dissidents challenged not just the givebacks Delphi was able to extract by filing bankruptcy, but the corporate restructuring — and the UAW’s acquiescence to it — that left the company vulnerable.

The legacy of Delphi combined with the Big Three contracts was inauspicious for UAW workers at American Axle Manufacturing, a parts supplier that was also previously part of GM. American Axle workers struck for 12 weeks against the company this spring, hoping to maintain their jobs and keep the Big Three-style concessions out of their contract.

Strikers hit American Axle hard, costing the company $370 million in sales and drastically affecting production at GM plants that used the parts. GM leaned on the UAW to settle with American Axle, and the parts supplier pointed to the example set by the automaker’s contract. After three months on the picket line, many workers felt they had little option but to vote up a contract that contains provisions for a two-tier wage scale and the introduction of a VEBA for retirees. Like at Delphi, many American Axle workers took the company’s buyout packages rather than bank on job security or risk further wage and benefit cuts.

“Delphi was the thing,” says Wendy Thompson, a retired American Axle worker and former UAW Local 235 president. “It was Delphi first, then they used that against the Big Three, and then they used the Big Three against us.”

In addition to the diminished living standards the auto concessions will impose on auto workers and the potential repercussions for other manufacturing workers, many UAW activists say the union should have mounted a campaign focused on a national healthcare system, thus eliminating the need for the VEBAs entirely.

The Big Three fully support Canada’s single-payer national healthcare system, because it saves them $1,200 to $1,400 per vehicle compared to U.S. production. In criticizing the VEBA plan, Schrade, Tucker and Davis wrote, “That’s a system that each company acknowledges has leveled the competitiveness playing field for them.”

The Canadian Auto Workers’ Gindin called the UAW negotiations a “missed opportunity” for U.S. healthcare reform. “The obvious solution to this dilemma is to follow the rest of the developed world into some version of a single-payer national healthcare plan,” he asserted. “The UAW is in a position to lead the way in such a campaign.”

The UAW GM dissidents agreed. According to Schrade, Tucker and Davis, “By going the VEBA route, the parties will have missed a historic opportunity to inject their significant political clout in the growing push for a national healthcare system in this country patterned after the Canadian ‘Medicare for All’ system.”

Instead, the concessions on healthcare provide a temporary fix and set a precedent for greater potential changes in what autoworkers can expect from the union.

Jerry Tucker doesn’t feel optimistic about UAW jobs, rejecting the claim that the contracts’ reduced labor costs have enhanced the Big Three’s competitiveness. Two-tier and the job reclassifications were “essentially throwaway concessions,” given Toyota’s and other foreign automakers’ announced intentions to create two- and three-tier wage structures of their own, Tucker says.    

He thinks the companies and the union should have had a wider perspective on the slowing economy and lost market share. “This recession was on the horizon when that bargaining was going on,” Tucker says. “Yet at no juncture did we hear the UAW leadership advise that some changes in product were essential for [the automakers’] survival, nor did management volunteer any of that.”

The Big Three have largely closed the productivity gap with foreign automakers, but gas prices remain high and the companies are behind in the changing climate of consumer tastes. Though Detroit’s decline may be attributable to mistaken product choices, GM, Chrysler and Ford will likely continue to trumpet reduced labor costs as their only possibility for survival. Without a new strategy for the UAW, fear critics, the next contract negotiations in 2011 will only see company demands for yet more concessions, in a downward spiral the UAW will be powerless to resist.

Without a new strategy from the UAW, says Tucker, workers will continue to “pay the price for everything — workers past, present and future.”

Simone Landon grew up in Detroit and writes for Labor Notes magazine.