Collective Bargaining in the Automobile Industry

LABOR RELATIONS IN THE UNIONIZED AUTOMOBILE ASSEMBLY INDUSTRY IN THE UNITED STATES: 1961-2006

By

Richard N. Block

Professor

School of Labor and Industrial Relations

Michigan State University

East Lansing, Michigan USA 48824

517-332-2888

Paper prepared for the Local Legislative Agenda for the Automotive Partnership Council for North America, Toluca, Mexico, 19-21 July 2006

July 132, 2006

INTRODUCTION

Labor relations in the unionized automobile assembly sector in the United States experiencing what is likely the most turbulent period since the U.S. industry was organized by the United Auto Workers (UAW) between 1937 and 1941. Collective bargaining in the auto assembly sector can be analyzed be dividing the post-World War II period into three distinct time periods: 1946-1979; 1980-2004; and 2005-06. This paper will analyze labor relations at the firm level during each of these time periods.[1]

LABOR RELATIONS IN THE U.S. AUTOMOBILE INDUSTRY, 1946-79[2]

Through the late 1970’s, collective bargaining in the automobile industry exemplified the arm’s length collective bargaining system in the United States that had developed starting in the late 1930’s. By the early 1950’s, the United Auto Workers Union (UAW) had organized and established collective bargaining relationships with the Big Three - General Motors, Ford, and Chrysler, as well as with the smaller auto producers – Nash Kelvinator, Studebaker-Packard, Hudson, and Kaiser Willys, and with American Motors, formed by a merger of Nash-Kelvinator and Hudson, in 1961 (Katz, 1987).

The relationship that was established had two major components: (1) corporate control over business decisions that unrelated to labor issues; and (2) negotiated terms and conditions of employment at both the corporate and local levels. Thus, the corporation exercised total control over such functions as product design, engineering, marketing, and pricing.

Negotiations were carried out at two levels; the firm level and the local level. Firm level bargaining was actually pattern bargaining. Under pattern bargaining, the UAW would negotiate a pattern-setting collective agreement with one “target” firm, and then attempt to apply that same agreement to the other firms. Although there were occasional deviations from the pattern, such as a profit-sharing agreement with AMC in 1961, these deviations were the exception. The basic point is that the UAW-represented employees of the GM, Ford, and Chrysler, enjoyed almost identical levels of wages and benefits

Pattern bargaining served the interests of the companies and the unions. From the point of view of the companies, it minimized variations in labor costs across their competitors. For the union, the uniformity of pay created an objective pay standard that was acceptable within the union, minimizing political costs to the leadership. (M at the M Footnote). Negotiations also occurred at the local/plant level. These addressed such matters as job classifications, job descriptions, seniority, and the many issues that occurred at the plant.

In order to avoid labor conflict, between 1948 and the later 1970’s , wage bargaining between the UAW and the industry and the resulting wage changes generally followed a formula. Wage adjustments were based on two main factors: an annual improvement factor (AIF) and cost-of-living (COLA). In principle, the AIF was designed to provide workers with wage increases as national productivity increased, and the COLA increases were designed to protect workers from a decline in real wages by increasing the money wage as the cost-of-living increased. COLA, the other component of the wage formula, provided 80% coverage for inflation between 1955 and the early 1970’s. The result of the formula was that wage increases were highly predictable, with variation determined primarily by the cost-of-living. (Katz, 1987).

During the 1950’s, 1960’s, and 1970’s, fringe benefits came to account for an increasing share of employment costs in the industry. In addition to health insurance and pensions, by the late 1970’s, the fringe package included paid personal holidays, 30 (years)-and-out pensions, and a guaranteed income stream. Katz estimated that while fringe benefits accounted for only 11.1% of hourly compensation costs in 1948, they accounted for 42% of hourly compensation costs in 1981 (Katz, 1987).

It is important to note that during this post-World War II period, wage and benefit increases were unrelated to the short-term economic situation in the industry. Downturns in sales and production were addressed through temporary layoffs. Because these downturns had traditionally followed the business cycle, and had always recovered, the companies and the UAW negotiated Supplemental Unemployment Benefits (SUBS). This was a benefit that provided laid off Big Three employees with monetary benefits over and above unemployment insurance so that the autoworker received 95% of his or her take-home pay. The monies came from a SUB account funded with per worker-hour contribution made by the companies.

Overall, labor relations system in autos during the thirty-year post-World War II period reflected an era of economic success for the U.S. automobile assembly industry. The “Big Three” auto manufacturers – General Motors, Ford, and Chrysler, dominated the U.S. market. This was an era of high wages and employment growth, and collective bargaining outcomes reflected this economic success.

THE TRANSFORMATION IN LABOR RELATIONS IN THE U.S. AUTOMOBILE ASSEMBLY INDUSTRY: 1980-2004

The changes in the automobile assembly industry in the United States since 1980 have been well documented in scholarly studies and the popular press and will not be repeated here. The major change is the continual decline in sales and market share of the traditional U.S. unionized domestic auto manufacturers, vis-à-vis nonunion non- U.S. manufacturers.[3] This has continued unabated. For the first six months of 2006, GM, Ford, and DaimlerChrysler, sales, including Mercedes, declined 7.5% as compared to the first six months of 2005. The “purely” domestic U.S. automakers, GM and Ford, experienced an 8.9% sales decline. Toyota sales increased 9.8% during this period. (Automotive News, 2006).

This increase in market share for the non-U.S. based companies has coincided with the non-U.S. manufacturers opening manufacturing facilities in the United States. These facilities are all nonunion (Hill and Brahmst, 2003). It is these two trends that have been driving collective bargaining in the U.S. automobile industry over the last twenty-five years.

Labor Relations in the Auto Industry, 1980-2004. [4]

While pattern bargaining continues to be a dominant characteristic of auto industry collective bargaining, the content of the pattern changed beginning in the early 1980’s. Through the 1970’s, the pattern generally focused on wage and benefit increases. Buffeted by employment declines in the industry in the early 1980’s, the focus of bargaining and the content of the pattern shifted from wage increases to job security starting in the early 1980’s. This shift of the focus of bargaining from increasing wages to enhanced job security that is the salient feature of firm-level collective bargaining in the auto industry during the last two decades.

The 1979 UAW-GM and UAW Ford agreements had no provision on job security. This is to be expected, as production worker employment in the industry had been generally increasing over the previous two decades. From a recession-trough low of 452,500 in 1958, production worker employment in Motor Vehicles and Equipment climbed to 708,000 in 1969 and to a historical high of 782,000 in 1978 (United States Bureau of Labor Statistics, undated).

By 1980, production worker employment in the industry was only 575,000, a 26.5% decline in only two years. Believing that this decline was not a familiar cyclical fluctuation in employment, but rather a structural decline in the number of production employees in the industry, the UAW implemented a bargaining strategy aimed at maintaining employment security for its members working in the automobile assembly industry (“Job Security . . ., 1981).

Although the 1979 collective agreement was scheduled to expire in September, 1982, the economic crisis in the auto industry spurred the parties to early negotiations. The UAW and Ford signed a 31-month agreement in February, 1982. Reflecting the new UAW priority on employment security, the 1982 Ford-UAW agreement included a 24-month moratorium on plant closings and a commitment by Ford on subcontracting to “make every effort” to maintain employment. As part of a disincentive for Ford to reduce employment, the parties also agreed on a Guaranteed Income Stream, under which an employee with 15 years seniority would receive 50% of his/her hourly base wage. This percentage increased with the employee’s length of service, with the employee receiving a maximum of 95% of take-home pay, net of government benefits and earnings from another job. (“Pay Concessions . . .,” 1982; “Joint UAW-Ford Summary . . .,” 1982.)

Significantly, Ford obtained relief on monetary employee compensation, as the parties agreed on wage increase moderation. Although there would be no reductions in wage rates paid on the date of the agreement, the AIF was eliminated, and COLA adjustments were deferred. The parties agreed that there the employees would not receive their 26 paid personal holidays during the agreement, and a special December holiday would not be paid. (Joint UAW-Ford Summary . . .,” 1982). The February, 1982 agreement with Ford established the industry model that would eventually apply to GM, Ford, and, eventually Chrysler. Employees would obtain enhanced levels of job security and the company would obtain relief on wage compensation.

A month later, the UAW reached a similar, but not identical agreement with General Motors. The major difference between the two agreements was that GM agreed to rescind four plant closings that had been announced and agreed to an experimental “Lifetime Job Security Program” at four plants. The plan used attrition and alternative assignments both within and outside GM to provide job security to 80% of the facilities’ workforce. (“UAW Summary . . .”, 1982).

The pattern was initially not extended to Chrysler. In order for Chrysler to obtain loan guarantees from the U.S. government in 1979, the UAW was required to make special wage concessions to Chrysler, breaking parity with GM and Ford (Block, 2001). In 1983, however, the UAW and Chrysler agreed on a contract which restored wage parity with Ford and GM. Reflecting the continuing precariousness of Chrysler’s financial condition, no employment security provisions were incorporated in the Chrysler agreement. (“New Agreements . . ., 1983).

In the 1984 bargaining round, the UAW obtained additional job security The agreements included Protected Employee Program (PEP) at Ford and a Job Opportunity Bank-Security Program (JOBS) at GM that were essentially identical. PEP and JOBS provided job security for employees with at least one year of seniority in the event of technological change, outsourcing, productivity improvements, transfer of operations, and production consolidations. Job security was not provided for a decline in employment due to volume declines, although, as noted, such employees would be eligible for SUB benefits. (Agreement . . ., 1984; Agreements . . ., 1984).

In addition, the parties for the first time agreed upon a dedicated maximum financial commitment. Ford promised $280 million over the life of the agreement and GM promised $1 billion (Agreement . . ., 1984; Agreements . . ., 1984). This had the effect of institutionalizing the program while minimizing financial uncertainty for the companies and converting a component of discussions regarding the program into traditional negotiations over labor costs.

Although by 1984, the system architecture for GM and Ford of a financial commitment of job security was basically complete, the parties continued to make adjustments through 1993. Building on the guarantees in the PEP and JOBS program, it was but a small additional burden on GM and Ford to convert these security promises into numbers. In 1987, the Ford and GM agreements established Guaranteed Employment Numbers (GEN at Ford) and Secured Employment Levels (SEL) at GM at each plant. The GEN/SEL was to reduced by one position for every two employees who left the company because of normal attrition (resignation, death, or retirement). The agreements also prohibited plant closings. The financial commitment was increased to $500 million for Ford and $1.3 billion for GM. Significantly, sales volume-related declines were exempted, as persons on layoff due to volume declines would draw SUBS. (Agreement . . ., 1987; Agreements . . . , 1987).

Employment security was accompanied by wage moderation . The agreements incorporated a 3% general wage increase for 1987, but only lump sum bonuses at 3% for 1988 and 1989, thereby minimizing increases in the base wage on which many benefits (vacation, etc.) are based. Eighty-one cents of the $.86 COLA increase that had accumulated was also folded into the base wage (Agreement, 1987; Agreements . . . , 1987; UAW-Ford Report, 1987) .

The sales volume exception was addressed in 1990. The agreement limited layoffs for volume reasons to 36 weeks over the life of the agreement, with the employee either being recalled or shifted to the JOBS Bank/PEP, and off the SUB fund, if there is no job was available. Maximum funding was increased to $586 million at Ford and $1.7 billion at GM. (1990 National Agreement . . .; Agreements . . ., 1990; “General Motors, UAW . . ., 1990; “UAW-Provided . . . ,1990; “UAW, Ford . . ., 1990).

The only major change in 1993 agreements was the inclusion of language clarifying the assignments that could be given to employees under the GEN/SEI programs. The funding maximum remained at $586 million in the Ford-UAW agreement and $1.7 billion in the GM-UAW agreement (Agreements . . ., 1993; UAW-GM Report, 1993).

The UAW then turned its attention to Chrysler, the smallest of the Big Three. After discussing the issue in 1993, the 1996 UAW-Chrysler agreement included a Memorandum of Understanding on the Employment Security System (ESS) program which essentially mirrored the programs in the Ford-UAW and GM-UAW agreements. (Letters, Memoranda . . .1996 . . .; UAW Summary . . . , 1996). Funding levels over the life the agreements remained stable at GM and Ford; $1.7 billion at GM and $586 billion at Ford. (Agreement . . . , 1996; UAW Summary, . .. , 1996).

Further adjustments were made in the 1999 agreements, the first agreements to expire in four years. The major change was the creation of benchmark employment s (SEL at GM, GEN at Ford, BEL at DaimlerChrysler[5]) minimums which would be reduced be .333% each quarter so that at the end of the agreement, benchmark levels in the agreements would be at 95% of benchmark levels at the commencement of the agreements. Funding levels over the life of the agreement were increased to $2.107 billion at GM, $944 million at Ford, and $451 million at DaimlerChrysler. No adjustments were made in the job security provisions in the 2003 GM and Ford agreements; funding levels remained constant. The 2003 agreements will expire in September, 2007. (Agreement . . ., 1999; Agreements . . ., 1999; Agreement, 2003; Agreements . . ., 2003.)[6]

Overall, these provisions created a situation in which employment declines in the unionized sector of industry would be due primarily to attrition, e.g. retirements. There would be no employment reductions due to technological change. As the unionized workforce was aging, one would expect to see decreasing employment over time.

Effects of Bargaining Outcomes, 1985-2004

The foregoing discussion indicates that the bargaining outcomes would be expected to have effects on wages and employment. One would expect that the result would be a slowing of wage growth and a moderation of employment reductions, essentially making employment reductions due to attrition rather than to reductions in demand for the product.

First, with respect to wages, if the union truly “traded” wage increases for employment security, such a “trade” would be expected to be indicated by wage data. First, using wage data provided by the UAW research department, average annual September-to-September changes in negotiated wage increases, composed of negotiated increases and cost-of-living increases of assemblers at GM and Ford were examined.[7] Two twenty-year periods were examined, the pre-employment security period 1961-80 and the employment security period 1985-2004. The period 1980-85 was excluded for two reasons. First, the 1980-83 was a period of transition and cyclical declines in employment in the industry, when the contract was being restructured. Second, the period 1983-84 was associated with the disaffiliation of all but one of the Canadian locals from the UAW and formation of the Canadian Auto Workers and a Chrysler “catch-up.”

For the period 1961-1980, annual negotiated wage increases, averaged 7.2% at the two companies. For the period 1985-2004, annual negotiated wage increases averaged only 3.6%, exactly half of the pre-employment security negotiated wage increases. This is consistent with expectations, indicating that the employment security guarantees were accompanied by wage moderation.

Block and Belman (2003) estimated that company payments into the fund for the employment security provisions added a maximum of 5.9% to the hourly wage paid by the companies, but that a more reasonable estimate was 4% to 4.5%. Based on this, it appears that the union “traded” approximately half of its wage increase for employment security guarantees and that GM and Ford “paid” for the bulk of the employment security guarantees by using reduced wages.

Second, using these same wage data, the difference between the annual percentage change in the negotiated assembler wage for GM and Ford combined from September to September and the annual inflation Rate, September to September was examined. This roughly corresponds to the improvement or decrement in the real wage, year-to-year and will provide a sense of the improvement in the economic circumstances of the auto workers as measured by disposable income. I take the mean of the difference for the 20-year period 1961-80 and compare it to the twenty-year period 1985-2004. The annual mean difference between wage increases and inflation for the twenty-year period 1961-80 was +.018, , which means, that on average, during this period, assemblers' wage increases exceeded the inflation rate by about.1.8 percentage points, suggesting a slight improvement in their standard of living each year during this period. On the other hand, for the twenty-year period 1985-2004, the mean deviation was .0062%, meaning that the real wages of UAW members in the GM and Ford barely kept up with the rate of inflation.