The potential strike between the United Auto Workers and the automakers will be an interesting test of the labor market. The current contract expires at midnight on September 14. So far, it looks like we will get a strike. The backstory will be a clue to see how much of Social Contract that ended in the 1980s gets clawed back.
One of inevitable symptoms of a tight labor market is a resurgence of unions, and it looks like they are back after a long slumber that started in the 1980s. US workers basically had the upper hand from WWII to the beginning of the Reagan Administration. That said, the Gipper didn’t end the power of the private sector union - foreign competition and the pivot to an economy driven by intellectual property did. The golden age of the 1950s and 1960s were always unsustainable, driven by a lack of competition. The US not only had to satisfy its own demand, it had to meet the demand of rebuilding Europe and Japan. By 1980, Europe and Japan were more or less re-built from WWII and we had new trade competitors in emerging Asia.
This began a long period where employers had the upper hand, and many of the gains workers made post the New Deal were rolled back. Things like the company pension were replaced by 401ks. A constant drumbeat of corporate layoffs became the norm. For a while, it seemed like employer power would reign supreme forever. That said, we might be seeing another sea change in labor. The negotiations between the United Auto Workers and the carmakers will be instructive about the balance of power and will say a lot about future inflation.
The UAW’s demands are more than just about vacation days and hourly pay. They want to get back many of the things that workers took for granted in the 1960s and 70s. The UAW wants:
Increase hourly pay by 46%
A reduction in the workweek to 32 hours with pay for 40.
The return of the defined-benefit pension plan
Annual cost of living adjustments
These are pretty big demands, and the final negotiations will tell us a lot about the labor market and ultimately the return of the wage-price spiral. If you include benefits, the average auto worker makes $60 an hour. According to some estimates, if the union got its wishes, the cost of an average auto-worker would increase to $150 an hour. The cost to GM would be something like $4 - $5 billion.
GM has offered 16.5% over 4 years. Suffice it to say we have a pretty big bid / ask spread here.
The last strike was in 2019, before the COVID pandemic and ensuing inflation. In 2018, the UAW selected GM and went on a six week strike. The union won two 3% annual raises, two 4% bonus payments of $11,000 and no changes to the health plan.
Last year, GM made $9.9 billion on $156.7 billion in revenue. So if the union gets everything it wants, it would cut GM’s profit in half. GM’s margins aren’t gargantuan like Google or Apple’s. Last year, GM’s profit margin was 6.3%. Nothing spectacular, and it shows there isn’t a lot of juice to squeeze.
The UAW is negotiating in one of the most robust labor markets we have seen since we had a military draft. What has changed? The favorable environment for employers over the past 40 years was due to a few seismic shifts which are largely played out. The first was simply the size of the Baby Boom generation, which increased the labor force. Second was the increase in the number of women in the workforce, which also increased the supply of labor. Finally, free trade and the American consumer’s taste for low prices put more expensive US labor on its back foot.
Today, the Baby Boomers are retiring en masse, fertility rates are way down, and the labor force participation rate for women peaked around 2020 or so. This big increase in supply has faded. A second issue is social engineering - the US held a college education as an unalloyed good, and vastly increased the number of college educated kids. Skilled labor was de-emphasized and now the US has a shortage of welders, plumbers, and electricians.
Is the private sector ripe for re-unionization? It is hard to say. In many ways, unions were more suited for one-size-fits-all workplaces where workers and jobs were more or less interchangeable and seniority was the prime predictor of salaries. Today, job titles (and compensation) are much more individualized. So it isn’t clear to me that we will see a massive increase in union representation in most industries.
If the UAW does wring out big concessions from the automakers, that will be something the Fed will certainly take into account with respect to future inflation. The return of cost-of-living adjustments would set the set the stage a wage-price spiral similar to what we saw in the 1970s, where prices rise, the unions negotiate big COLAs in their contracts, which pushes up inflation, which pushes up the COLAs again. When Jerome Powell talks about inflationary expectations, this is a big part of that.
Ultimately for the UAW, time is probably not on their side as the internal combustion engine’s use will only decline going forward and Tesla is non-union. The internal combustion engine will probably not go away completely, and there is the possibility that the Big 3 will be successful with electric vehicles. That said, other unions like the Teamsters (think UPS) will be watching closely to see how the UAW fares in this new age of scarce labor. If we see a return of negotiating power for workers a return to 2% inflation might not be in the cards.