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Chrysler takes aim at Detroit's two-tier wage system

Carlos Osorio / AP

The number of direct hours of labor in a typical Detroit product has been dropping steadily, to under 20 in some cases.

 

It took Detroit’s automakers decades to win a money-saving two-tier wage structure from the United Auto Workers Union. But that might be about to change at Chrysler.

The automaker’s CEO Sergio Marchionne now says he’d rather have all his workers on the same pay scale, hinting at big changes when the maker’s new contract expires in 2015.

That has plenty of folks in the auto industry scratching their heads and wondering what the executive — who also heads Chrysler’s Italian partner Fiat — has in mind.

What’s clear is that the UAW also wants to eliminate the two-tier structure, something that has divided the union and nearly led to the rejection of this year’s contracts with Chrysler, General Motors and Ford.

“This economic disparity between people on the (production) line is not something that can go on indefinitely,” Marchionne told reporters during a conference call to discuss the carmaker’s quarterly earnings.

Ironically, industry analysts say that reduced labor costs played a major factor in the $212 million profit Chrysler made as it clawed its way back into the black in the latest quarter.

Newly hired workers — about 13 percent of Chrysler's hourly work force — earn just $14 to $16 an hour in wages and about $25 when all their benefits and other costs are added in.  That’s roughly half what it costs to employ a veteran member of Chrysler’s 26,000-strong UAW work force.

But those costs will be going up. Going into this year’s contract talks with Detroit’s Big Three, the UAW was well aware that it was not going to win much in the way of new money, so it had to focus on a short list of gains that included so-called signing bonuses and cash to offset inflation during the course of the four-year contract.

But it was clear there was strong rank-and-file opposition to the two-tier wage system — which was approved by the UAW during 2007 contract talks to help the industry weather what was clearly going to be a tough recession.

Going into this year’s contract talks, UAW President Bob King asserted that workers in the second tier were not “making a living wage,” but in the end he had to settle for modest pay increases of about $3 an hour for those new hires.

The response was unavoidable, with workers approving their tentative contracts by some of the largest margins seen in decades. In fact, if not for aggressive lobbying by King and other senior leaders the Ford contract very likely would have been rejected. And UAW leaders had to use a procedural trick to ensure ratification of Chrysler’s contract.

That clearly wasn’t lost on Marchionne, who is counting on big growth at Chrysler — the smallest and most troubled of the Detroit automakers.

Facing even more serious problems with unions back in Italy, Marchionne has hinted he might make Chrysler the dominant partner in the trans-Atlantic alliance. To do that, it would help to have the UAW “on his side,” notes analyst Joe Phillippi of AutoTrends Consulting. And that might require giving up the two-tier wage structure, he added.

But it might not be as serious a loss as that might seem. There’s no question that Detroit needed a break, especially going into the 2007 contract talks, when UAW workers were taking home wages and benefits worth some $76 an hour.

Today labor costs for even veteran employees have been reduced by a third, even as non-union competitors, such as the Honda plant in Marysville, Ohio, have seen their own costs rise.

But there’s something that may be more significant than the wages and benefits workers earn: concessions the UAW has granted permitting Chrysler and its domestic competitors to steadily improve productivity.

Plants that once employed 5,000 workers now require less than half that staffing. The number of direct hours of labor in a typical Detroit product has been dropping steadily, meanwhile, to under 20 in some cases. 

Even at $50 an hour, notes Phillippi, assembly line labor accounts for barely $1,000 to $2,000 of the $30,000 cost of a typical U.S.-built car.

Keeping the UAW happy may be well worth giving up the second tier, which Marchionne said would approach 25 percent of the total Chrysler workforce by 2015, when the current contract expires.

Those who know the executive believe this change wouldn’t be a simple giveback. The Canadian-educated Marchionne would almost certainly demand a quid-pro-quo, possibly meaning further concessions by veteran workers. At the very least, eliminating the second tier would be offset by holding back cost increases elsewhere.

In his conversation with reporters, Marchionne suggested his goal would be to convince the UAW “to accept the downside while rewarding people on the upside.”

The new Detroit contracts include significant improvements in profit sharing bonuses. The next time around, Chrysler may very well seek to get even more of its labor costs linked to its performance, so workers would see major gains during good years while taking pay cuts in the bad times.

Whether the UAW and its members would accept that trade-off remains to be seen.