🔋Rat Race
The UAW strike demands for labor and hours are non-market dynamics which historically contribute to unemployment, prolong downturns, and can destroy corporate competitiveness.
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News that recently came across my attention is the construction delay on the Ford battery factory in Michigan due to the United Auto Workers (UAW) strike. A GM facility that was to be converted to an EV plant was also delayed in addition to a number of other auto facilities. This has been a big news event of the past month and has cost the companies $7.7 billion as of Oct 12 and is an ongoing even as of this piece.
Depending on their power, unions can have vast economic ramifications. The UAW actually started amidst the Great Depression (GD) and found its first targets in GM and Ford all the way back in 1936. Last week I discussed the true causes of the GD and some of the lessons from that period which translate into what we know to expect from the government and federal reserve moving forward. One of the policies I left out last week was the labor market. New ideologies, labor unions, and radical new economic philosophy at the time were one of the major reasons the GD lasted as long as it did. What does the UAW strike have to do with labor and wage rates of 90 years ago and what does it mean for today?
Unions
Like I discussed last week, much of FDR’s policies were rooted in those first implemented by Hoover. In 1926, Hoover as Secretary of Commerce pushed a law granting the railroad industry increased power of unionization. This was the first federally enforced unionization in the US and the beginning of the marriage between government and union. Before then, politicians may have had varying degrees of support for unions, but the government did not backstop them with the rule of law to the same extent as we know today. It is thought of that Hoover was anti-union and FDR finally signing the Wagner Act of 1935 to strengthen the power of unions federally is what helped workers, but this is simply not the case. Hoover set the stage for federally supported unionization later to be adopted by the other party as a primary policy. Hoover not only encouraged unionization on the federal level, but insisted on maintaining wage rates and supported laws limiting working hours.
According to Rothbard and the Austrian economic theory, unions are well-intentioned, but don’t understand the second and third order consequences of their actions and how they may hurt the very people they proclaim to protect. Unions always fight for higher wages and lower hours. Given a business cycle bust phase, the inability for wage rates to adjust properly prolongs unemployment. For corporations, it lowers profitability of investment and removes the price mechanism to determine when is an appropriate time to invest in labor. This means companies will downsize, reduce working hours, implement layoffs, cut back further investment including hiring, and make more mistakes when hiring. All of these consequences are deleterious to the worker. Reduction in working hours can offset wage increases, which commonly offset rising labor costs.
Unions and politicians advocating to maintain wage rates have some sense that there is a market rate for labor, as they would just propose 3x wage increases and workers would be rich. In reality, the business would layoff people, shut down operations, or raise their prices and pass these costs on to consumers and their real wage would remain the same given higher prices.
There is no such thing as a free lunch. - Milton Friedman
Wage income is merely the multiple of wage rates and working hours. A worker making $20/hr working 40hr weeks would make $800/week, or an estimated $41,600 for the year. If unions advocated for a 25% wage increase to $25/hr, workers would rejoice. Due to companies now having larger costs, they may downsize operations they don’t deem as profitable. Ignoring unemployment, a $25/hr worker whose hours were cut back to 32hrs still makes the same $800/week. The company is less productive, workers are laid off, and those working don’t see the income improvements they were promised. Average weekly hours for the manufacturing sector is actually an important leading economic indicator which is a predictor of recessions. Change in hours peaks ahead of recessions and trends down into one. Propping up wage rates artificially higher than the market value makes this cycle of over hiring/unemployment worse and makes recessions more severe.
Welfare
The national welfare or unemployment insurance system as well as social security policies that we have today were more FDR new deal policies from the GD, specifically 1935. Prior to the GD, people had greater sense of responsibility and blamed themselves for their lack of employment. Furthermore, in times of need states and other private organizations would offer help to provide food and shelter to people as they found a new job. While Hoover did not pass any bills on unemployment insurance, he was adamant to backstop any relief agencies with federal money, therefore subsidizing unemployment in a more round about way.
Today, organizations fight over government money, but during the GD it was the opposite. The Red Cross at the time had a clear position against accepting federal aid. We know with hindsight that agencies emboldened with federal support grow in size to match the government involvement to reach those funds, providing an ill-incentive to grow larger, allowing more and more people to seek out the funds.
Public works projects were introduced to help the unemployed worker and are another form of unemployment relief. Hoover bragged about his public works and raised budget deficits to fund them just like FDR. Instead of searching for a new job that society needs or that a worker is interested in, arbitrary jobs were created and prolong this worker finding long term employment.
Labor Shifts
As the world changes, workers need to shift to where they are needed. When we moved from an agricultural society towards the industrial revolution, from the “physical to digital” age, and the looming AI/robotics changes that many predict, the labor market went through large shifts. Every one of these instances involved hardship for large swaths of the nation whose jobs became obsolete and eventually were forced to search for different jobs. Yes, this can be a tough process, but I doubt many people would suggest that the world shouldn’t move forward with technological advances that add efficiencies and make the world a better place just so some people could keep their jobs.
Prolonging this displacement of labor from where it is obsolete to where it is needed next is the true misdeed of central planners, especially during the Great Depression. Technology makes things cheaper because there is competition in the market to make the best product. When your savings can help you buy more things, it can be a good thing. If someone has lost their job or their wage rate cut, they can call upon savings or deflationary goods to ease the transition process. We hear a lot about real wages, but if prices are going down, real wages could still maintain or even go up depending on price deflation. Today, we live in a world of artificially derived inflation stemming from the government where there is constant anxiety about earning a wage high enough to keep up with rising prices. In this “rat race” that the US an much of the world is accustomed to, the unemployed person is in a race against the clock as prices go up and any savings held are devalued.
By not letting wage rates and prices adjust, and perpetually holding each higher, companies and labor lose their long term competitive advantage. The manufacturing base in the US has been gutted for labor elsewhere for a reason, and it has to do with incentives put in place. There is still tremendous demand for manufacturing and manufacturing labor, just not at the price that it is bid up to in the US.
Many working class folks have become disenchanted by the system they were forced to live under and is manifesting with growing populism as I’ve discussed before. Any drive through the rust belt region and you will see industries and economies destroyed and gain a better understanding of why the US is in the state it is in.
United Auto Workers
The UAW are demanding a 32 hour work week, 40% pay increase, increase health benefits, and pension benefits (already bailed out during 2008 recession). While these will be negotiated down, the clearly show the desires of the union. Consistent with history, wage increase and shorter hours are the top priority. So far, the union has “record offers” from the big three automakers, but the strike is still ongoing.
While Ford and GM site economic uncertainties tied to labor as reasons for delaying their battery factories, we know from Go Fund Me that the Inflation Reduction Act (IRA) is providing the brunt of the cost associated with building these factories as well as labor costs for a few years. This is likely merely a delay and used for leverage in their battle against the union. They can claim that they may not be profitable unless the UAW negotiates, but there shouldn’t be any concern about construction and profitability since the funding is from the government. This may be more indicative of their business in general/long term prospects, rather than specifically the EV/battery factories.
It has been shown by Rothbard that artificially maintained wage rates are a significant reason for the high unemployment rate and prolonged hardship in the GD. Giving the economic uncertainties and near inevitability of a recession ahead, artificially higher wages may increase unemployment, lead to closer of additional plants, lead to the bailout of these companies or their pension funds by the government, encourage further automation to reduce labor, and shutter auto market competitiveness. This is bad for employees because it will reduce the investment profitability and thus reduce the companies future investments. This could result in closing down facilities, layoffs, and reduction of working hours beyond those desired by the UAW. Manufacturing production cost is largely a function of labor and energy costs, so this directly means that Ford, GM, and Stellantis will be less competitive on their cars and their profit margins reduced. Companies may attempt to pass wage costs onto consumers which would only act as upward pressure on car prices inflated in recent years by interest rates and supply chain disruptions. While my base case is not that these prices maintain or stay higher, it certainly could contribute to future unaffordability just like trends of larger/more expensive vehicles.
Companies like Tesla are the leaders in EV technology and manufacturing. They have fought against unionization the whole way which would force them to increase wages by roughly $20/hr (before UAW strike). Tesla is also known for its advanced automation which helps keeps labor costs low and margin higher than its competitors. Tesla would not be the hallmark it is today with unionized workforce. Them and other un-unionized companies like Toyota stand to benefit greatly from the UAW strike as their margins will be considerably more competitive moving forward.
With a deteriorating consumer balance sheet (record high credit card debt and low consumer savings) and looming recession (yield curve, leading economic indicators, etc.), how will we look back on this UAW strike in a years time. Larger numbers of laid of workers will not appreciate a wage increase if they no longer have it. Further, given higher costs, will the government continue to step in and fund these companies and their potentially unprofitable ventures?
Workers today often through unions feel the need to fight for higher wages in a world where prices are constantly increasing through inflation directly stemming from the federal reserve and fiscal deficits. I don’t blame them. However, their noble goal to maintain wage rates is often met with deleterious consequences of unemployment, offshoring, or industries becoming uncompetitive in the long run. These consequences are then subsidized by the government and only add to the overall labor market distortion, price inflation, and exploding US debt. The business cycle “bust” phase can only be delayed for so long before market realities resurface or inflation continues. Until next week,
-Grayson
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As a left leaning Libertarian (haha, whatever that is) I generally agree with your assessment of some unions. Some pension systems too are crazy generous (California especially-- I have two friends that worked seven years for the state, retired early, and will likely get payouts for thirty years. How does THAT make any sense?) Costco and WinCo may be better examples of unions/co-op models that are reasonable. Still it's hard to blame folks for wanting more money with high housing, tuition, healthcare, and other costs these days. If the Fed keeps printing money to "fix" things this will keep exacerbating the situation. Though painful, a depression/deflationary event would help reset our maligned trajectory and perhaps sober up unions that expect so much. Don't know how to resolve the deficit but historically I think countries just defaulted and moved on (this would entail a global default of course).