UAW: It Should Be Giving Up More

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 |  Includes: F, GM
by: Troy Racki

Parents, next time little Johnny asks you what he should grow up to be - a lawyer, a fireman, or a doctor, just tell him to become an auto worker.

Seriously.

If you sit down and do the math you will discover that an 18-year-old high school graduate who remains with the UAW for 30 years will have the ability to earn 10% more than a 22-year practicing pediatrician. How is this so? Are we really paying our auto workers the equivalent of a physician?

According to the United Auto Worker's website, an entry level position with the union pays about $33,420 for the year. This includes their starting salary of $14.20/hour, a 6.4% retirement, a $1/hour payment to their health care fund, and a generous national PPO health insurance plan. Meanwhile, our pediatrician earns $0/hour working towards their degree while simultaneously taking on school loans. The following year, the union employee receives a pay increase of at least 3.75%. With that in mind and fast forwarding through time, the UAW worker will earn approximately $304,463 over the next 8 years. Meanwhile, according to the American Medical Association the average medical student will be $139,517 in debt upon receipt of their degree.

Considering a 25% federal income tax rate, and a 4.35% Michigan state income tax rate, our UAW employee will have taken home $215,103 in compensation for their 8 years. The difference in net worth between the auto worker and the doctor would stand at $354,620. If the auto worker invests their $215,000 at a modest 5% return, that amount will balloon to $350,380 in 10 years while the doctor's loans will end up costing $227,258 after 10 years at a 5% student loan rate.

This massive difference of $577,638 of net worth is why the doctor can never surpass the line worker. It's not until their 10th year that the starting pediatrician actually earns more than the line worker at their $30.065/hour average ($80,664 vs. $60,130), because most two year residencies pay less than the UAW.

In year nineteen of the calculations, the UAW worker will earn $63,130 in salary, $23,819 in retirement benefits value, and $18,366 in interest off the compounded value of their first eight years of work. The amount of $105,315 is nearly equal to the pediatrician earning their salary of $108,289, which typically has few benefits for the solo practitioner. While over the next 11 years the pediatrician will earn more than the line worker, they will never achieve a net worth greater than the UAW worker in part because of the generous benefits and the initial 8 years earnings which will have compounded to $629,232 by year 30. Total benefits to the worker during that time will amount to $352,805.

At year 30, the UAW worker will have achieved a net compensation of $2,447,597 versus the pediatrician’s $2,216,378, a winning margin of about 10%.

So we ask ourselves: Can America afford auto doctors?

With Chrysler in surgical bankruptcy, General Motors (NYSE:GM) flirting with it and Ford Motor (NYSE:F) trying to keep its head above water, these days there's one abbreviation upon many lips - the UAW. Between the bondholders and the UAW, these two factions hold the future of the Big Three in the palm of their hand. Reducing liabilities to both are necessary for the continuation of the American automobile industry.

Currently, things are not looking so good for the bondholders. Right now it appears that they will receive just 10 cents on the dollar according to the Wall Street Journal. This return of their principal will come in the form of common stock. Meanwhile, current share holders will be hit with a 100 to 1 reverse stock split, putting their ownership of the company at just 1%.

But what about the UAW, what are they going to give up? So far, concessions made by the union appear to be few and far between, forcing massive layoffs. President Obama currently appears to have the UAW's back; after all, the 721,025 active, retired, and spouse members of the UAW voted for him. Currently, GM is offering the UAW $10 billion in preferred stock at a 9% yield, along with $10 billion in cash, in exchange for $20 billion in obligation forgiveness. Is 100 cents on the dollar really fair when bondholders are getting just 10?

Honestly, the UAW should be giving up more, and we as a society should be asking for just that. Do we really consider a line technician of equal compensation as an experienced physician? A physician's decision can determine life or death. Is that equivalent in importance to putting a wheel on an axle? Regardless of the answer, that's how we are currently compensating our auto workers.

Why is the government satisfied in making the creditors eat the lion's share of the loss? Those nearly worthless GM bonds are held by mutual funds that represent many American retirees who need the steady income a bond provides. What about the $13.4 billion in loans the taxpayer gave GM? Why should half of it get swapped into common when the UAW gets preferred?

Even if GM avoids bankruptcy and continues on to 2010, paying and promising our auto workers a compensation level equivalent to our physicians is simply unsustainable. If America wants to continue to produce cars, it needs to be more innovative and competitive on the world's stage in terms of price and quality. Otherwise evolution, the survival of the fittest, will dictate the eventual extinction of the big three. The UAW should be mindful of this when it comes to the bargaining table, otherwise it will end up killing the goose that laid its golden egg.

Disclosure: F long