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GM workers on strike at a plant in Ohio in April 1972.

The new, new deal

Money | GM-UAW agreement signals an era of changing expectations

Issue: "Mission: Impossible?," Oct. 13, 2007

For the U.S. auto industry, the '70s may finally be over. The Sept. 26 deal between General Motors and the United Auto Workers marked what may become a new era in labor-management relations-one in which workers and their unions recognize that the old ways of doing business no longer work.

It was long overdue. A grand illusion of post--World War II America held that large companies could produce quality products at competitive prices while operating miniature welfare states. A 1970 UAW strike against GM was the high-water mark for this concept. To end the strike GM agreed to lavish health-care benefits and a "30-and-out" system in which workers could receive full pensions and benefits after 30 years of service, even if they were well below the normal retirement age.

Everyone assumed that GM could afford this because, in 1970, GM was on top of the world. The company made half the cars sold in the United States, and nobody could foresee such dominance ever fading.

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But it turns out that giving money and benefits to able-bodied people who no longer produce anything is a bad business model. By 2007, GM was paying 340,000 UAW pensioners but employed only 73,000 UAW workers. Less than half of the company's enormous per hour labor cost was going to the workers who produce cars.

The result should have been predictable: Pension and health-care costs contributed to the company losing both market share (down to about a quarter of the U.S. market) and billions of dollars (about $12 billion over the last two years). GM entered this year facing over $50 billion in liabilities for pensioners' health care, a calculation that was really only a guess because nobody knows how much health costs will increase in the future.

The company's new agreement with the UAW marks a step on the road to reality. The new deal allows GM to unload pensioners' health costs onto the UAW by setting up a $30 billion union-administered trust fund. It also allows the company to give buyouts to older workers, pay lower wages to new workers, and reform its "jobs bank," a system for paying wages to laid-off workers.

For workers and their unions, it's a sign of a new way of thinking: a realization that they, too, have an interest in their company's profitability.

Balance Sheet

HOUSING: An index that predicts home sales in the near future hit its lowest level in seven years in August. The National Association of Realtors said last week that its index of pending sales was off 6.5 percent from July and 21.5 percent from August 2006. Analysts, such as Joshua Shapiro of MFR Inc., called the report a sign of continued problems in the housing market: "We haven't reached bottom yet."

JOBS: The U.S. job market is growing, but not as fast as it was earlier in the year. A report last week from ADP Employer Services said that U.S. employers added 58,000 jobs last month, down from an average of 98,000 per month in the first half of the year.

HEALTH: One of the best ways for the United States to improve its economy would be to improve its lifestyle, according to a report last week from the Milken Institute. The study found that common chronic health problems cost the U.S. economy $1 trillion a year in both health costs and lost productivity. The study's authors said lower rates of obesity and smoking and increases in early detection of major illnesses would pay large dividends for the economy.

Timothy Lamer
Timothy Lamer

Tim is managing editor of WORLD magazine.

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