It Takes a Whole Village to Raise an Industry
By Jim Stanford *
Triennial contract talks between the Canadian Auto Workers and the North American automakers kicked off last week in Toronto, the first since the industry’s near-death experience of 2009. The discussions feature a familiar clash of ideas: the automakers demand labour cost reductions to match cheaper foreign jurisdictions, the union argues that workers deserve some payback for their past sacrifices that boosted the industry’s profits. (Full disclosure: I crunch the numbers for the CAW side in these negotiations.)
Some commentators argue it’s not just wages and benefits that are at stake in these talks, but the whole future of the industry in Canada. If the union doesn’t cut compensation, they suggest, the auto plants will leave.
These dire predictions are overstated. While the strong Canadian dollar has indeed pumped up apparent costs in Canada, our industry still has a lot going for it. Productivity is 5-10 percent higher than in the U.S. Plant utilization (which can affect costs more than compensation) is strong. Assembly plants can’t just pick up and walk away: they are enormous, fixed, long-lived assets. And the companies are making very strong profits in Canada (in retail as well as manufacturing). They won’t walk away from a good thing. Indeed, Toyota and Honda, unconstrained by pre-bargaining optics, are ramping up production here despite the high dollar and compensation that essentially parallels the CAW’s.
Worldwide experience, moreover, suggests that low labour costs are no “magic bullet” for industrial success. Scores of countries feature poverty-level wages but have no auto production whatsoever. Meanwhile, the most successful auto producers are increasing wages, not cutting them: Germany, Japan, and Korea in the developed world, and Brazil and China in the emerging world. In fact, the whole point of attracting a high-productivity export-oriented sector like auto is precisely because it generates above-average incomes, that then spill-over throughout the domestic economy.
Instead of browbeating their workers into ever-lower compensation, these jurisdictions have invoked a toolbox of pro-active policy measures to boost investment, productivity, and net exports: everything from subsidized capital and managed currencies to technology incentives, trade interventions, and even outright public ownership. Effective policy, not wage cuts, is the common ingredient in their success.
Imagine, purely for discussion, that labour costs were reduced in Canada. Right now, with a very strong dollar, total nominal labour costs at the three companies (including benefits) average about $3 per hour more than in the U.S. (Real wages, adjusted for higher Canadian prices, are actually lower here.) Suppose that gap was eliminated, and costs fell by $3 per hour. Would that usher in a new era of automotive prosperity?
It takes an average of 29 hours of in-house shop-floor labour to manufacture one vehicle (including engine, transmission, and final assembly). A $3 hourly saving therefore translates into an $87 reduction in the cost of a car. That’s not even enough to pay for deluxe floor mats in your spanky new sedan, let alone underwrite the future success of an entire industry.
Meanwhile, the all-important policy context in Canada is currently making things worse, not better, for the auto industry. For example, the Harper government is aggressively pursuing free trade deals that could soon eliminate tariffs on imports from three different auto-exporting powerhouses: Germany, Japan, and Korea. That would undermine the competitive position of domestic-made vehicles by around $2000 per unit – outweighing our hypothetical labour savings by a 20-to-1 ratio. Similarly, the continuing flight of the loonie eats up any labour savings as fast as they can be tallied. Indeed, the loonie’s 5-cent rise since June alone has added $3 per hour to Canada’s apparent hourly cost.
It seems almost pointless to even worry about labour costs, when the broader policy framework that is so essential for industrial success is glaringly absent.
Direct hourly labour costs are less than 5% of the total cost of designing, engineering, manufacturing, transporting, and selling a new vehicle. Yet they capture 99% of the attention. If the analysts are serious about preserving and building this industry for the long term, they’d better look beyond the headline-grabbing labour talks, and start to imagine an all-round industrial policy framework – like those in other successful jurisdictions – that offers a more promising economic recipe.
* Jim Stanford is an economist with the Canadian Auto Workers union, Canada's largest private-sector trade union. The union’s proposal for a national auto policy is available at www.rethinktheeconomy.ca. A version of this commentary was originally published in the Globe and Mail.