Smith Faculty Opinion Article	September 26, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

UAW - GM Pact Leaves GM at Cost Disadvantage

The details that emerged in the press today about the historic UAW - GM labor pact indicate the deal may prove the death knell for yet many more Midwestern manufacturing jobs.

Although, GM, by funding an independent trust, has managed to move retiree health care costs off the books, the residual liability remains unclear. As with the Delphi spin off, if GM must step in when the health care trust runs out of cash, this may prove nothing more than a bookkeeping rouse. Otherwise, Mr. Gettelfinger has set up his successor to deliver the bad news to GM retirees, that there is just not enough money to meet their expectations. The actual outcome will like lie between those two extremes.

That aside, much of GMs labor cost disadvantage lies in the wages and fringe benefits it pays workers making cars today--those are not legacy costs. The pact does not much reduce the premium GM pays over Toyota, except only new hires. Temporary workers will be upgraded to the existing pay structure, and according to the Detroit Free Press, only those new hires that are not directly involved in the production of vehicles will be offered the new, lower pay scale.

Toyota already has the ability to differentiate pay among production workers and those that mow the lawn, and the fundamental cost disadvantage imposed by GMs high scale for workers on the line remains. The pact does not call for new pay raises but it does provide for significant bonuses in the out years of the contract; hence, the pact raises pay but GM and the UAW hope investors wont notice.

Lost in all the coverage has been the fact that legacy costs are only part of GMs problem. This pact does a lot to reduce legacy costs but not enough to eliminate the actual costs GM faces making vehicles today.

Other disadvantages will also continue to apply. For example, the agreement constrains GM investments, such as commitments to make certain products in the United States, that Toyota and other Asians do not face. The same goes for burdensome work rules and limits on locating and selecting suppliers to maximize supply chain efficiency

Overall, GM was very very uncompetitive before this deal and is now just very uncompetitive.

The pacts ultimate impact will depend on how the agreement is applied to Chrysler and Ford. Those companies can less afford to continue the madness the UAW imposes. If they buy into this pact, GM may continue to hold is own while Toyota and the other Asian manufactures eat up Chrysler and Ford.

Its the old story of the bear chasing hunters in the woods. The fastest hunter does not have to worry, because the bear will eat the slowest runner.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.