It’s en vogue to bash GM for its overpaid workers and its supposedly kowtowing management. Holman Jenkins at the WSJ ($) blamed the UAW and the Wagner Act for GM’s implosion, citing “a job security program that means laid-off workers are still carried on the books at full pay and benefits no matter how few cars GM churns out.” Indeed, the GM Job Bank has come under a lot of fire — those people are being paid not to work!!! Can you imagine anything so wasteful? (Gordon Smith notes: “And you thought academic tenure was cushy!”) Larry Ribstein blames Michael Moore for adding to “a rich vein of populism that has hampered the ‘creative destruction’ necessary to adapt in a global economy and, along the way, kept these perverse labor policies in place.” (Ribstein expands on this in a follow-up post; not surprisingly, SOX is also part of the problem.) Over at Business Law Prof Blog, Dale Oesterle writes:
GM overpaid labor, buying peace for managers, at the expense of shareholder profit (and share price) for years. Now GM’s survivability is at stake; employees themselves would be better off it the GM board had been more careful of shareholder profits. Railroads situation is similar to GM (they have special legislation that protects their unions). Compare GM’s (or the railroad’s) situation to that of Caterpillar’s. Caterpillar went through some tough strikes to hold the line on labor costs; Caterpillar is now doing very well and is an international success story.
The good Professor Bainbridge reproduces Oesterle’s argument and simply adds, “Ditto.”
Oddly enough, many of these same folks believe in shareholder primacy based on the notion that the poor, defenseless shareholders have very soft contractual entitlements: they get dividends if and when the board decides to give them out. Other corporate constituencies have the ability to negotiate for much more specific contractual returns. Thus, if corporations maximize returns to shareholders, they will by necessity have satisified all other constituents, who get paid before shareholders.
So why are employees and their representatives to blame for maximizing their contractual returns? Isn’t that what they were supposed to do? I guess they were supposed to do what the employees at Caterpillar did, and work with management to make sure that their wages were “reasonable.” But wait a minute — Caterpillar got its employees’ wages down to a “reasonable” state only after more than a decade of bare-knuckles labor strife, which included a passel of unfair labor practices as found by the NLRB. (Prior Prawfsblawg posts on Caterpillar can be found here and here.) Caterpillar may be an “international success story” for its shareholders, but ask its employees if they’d agree.
The notion that GM employees are complicit in their company’s demise conflicts with the general model of shareholder primacy. Employees are no more to blame for being overpaid than, say, raw material suppliers are to be blamed for charging too much. Do you see shareholders being blamed for failing to make sure that talented employees were sufficiently compensated? Under the shareholder primacy model, only management is to blame — and that failure of judgment, like millions of others across the history of our economy, was well within management’s eminent “business judgment.”
Of course, management can’t be blamed for taking too much, even though they essentially pay themselves. Larry Ribstein contrasts GM’s management with CEO success stories like GE’s Jack Welch and AIG’s Hank Greenberg, and says:
We know what’s happened to them – in disgrace because they supposedly took too much from their companies. Jensen’s essay [Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems] shows why the important problem is not what folks like this are getting paid, but how they and their colleagues are running their companies. We’re not going to get to that result by making sure that the geniuses and mediocrities alike are incentivized like bureaucrats.
I still think, as I wrote earlier, that the notion of blue-collar workers get paid well and even getting paid for not working is simply anathema to many people. Yet some of those same people defend the rights of companies to provide managers with options, pension plans, and golden parachutes that allow executives to retire well before the GM Job Bank employees will. Assembly-line workers, like CEOs, are getting paid for their contributions to the company. Maybe GM can’t afford its high wages any more, but employees were not morally wrong to fight for those wages. And perhaps, just perhaps, management rationally believed that its employees deserved them.
Posted by Matt Bodie on April 6, 2006 at 11:04 AM
Comments
Given the relative weakness of American labor and American labor laws (allowing permanent replacement of strikers, barring secondary strikes and pickets, etc., etc.), I’m not sure the problem is really that unions can so easily overprice their labor. The broader problem is that the U.S., practically uniquely, developed a system of health and retirement benefits that relies almost exclusively on provision by private companies. While GM has problems beyond labor costs, of the labor costs, it’s health care and retirement benefits that are really hurting.
As to Matt’s original post, while I take Dylan’s point, I think a lot of folks (including those Matt cited) really are attributing moral blame to the workers. And I agree with Matt that it’s instructive to listen to allegedly free-market capitalist types that are all for everyone maximizing their own profits and/or compensation — as practically a moral and economic imperative — except for those money-grubbing, selfish, short-sighted folks on the assembly line in the rust belt.
Posted by: Joseph Slater | Apr 6, 2006 11:46:26 AM
“The notion that GM employees are complicit in their company’s demise conflicts with the general model of shareholder primacy. Employees are no more to blame for being overpaid than, say, raw material suppliers are to be blamed for charging too much. “
I think words like “blame” or even “responsibility” lead you astray. What’s being discussed isn’t the moral content of their actions, but the practical power relationships in industries that because of their structure (airlines) or legal power given to labor (apparently autos and railroads) that give labor the power to demand (or even “extort”) higher wages than what would prevail in a freer legal enviroment or different cost structure between variable and fixed capital costs (airlines again).
Whether labor “should have” taken less or management “should have” given less misses the point – labor in these situations can cause enough short term pain that there really isn’t any rational response but to give in to their long term demands that in a competitive market involving companies not similarly constrained (Southwest Airlines, Toyota, etc.) means they won’t actually have a long term future to pay all of those promises.
Put more bluntly: If I hit someone for insulting me, and he pulls a gun and demands an apology from me, I’m not worrying about who is to blame; I’m worrying about who has the gun. Management may or may not have the “responsbility” in these circumstances. They do, mostly, lack the power to do anything much.
Posted by: Dylan | Apr 6, 2006 11:29:46 AM