Friday, October 5, 2007

GM's new union contract - a revolution in capitalism?

A revolution in the modalities of capitalism just happened in the American auto industry and few took notice.

General Motors Corp., a once hugely successful manufacturer of automobiles, negotiated new terms of employment with its union. No doubt, union acceptance of these new terms was forced by the downturn in GM’s profitability and financial prospects.

This year, for the first time, foreign brands captured more than 50% of the domestic American market for automobiles, with Toyota overtaking Ford in number of vehicles sold to boot.

Under the new contract, the United Auto Workers accepted responsibility for payment of health-care needs of retired GM employees, some US$51 billion in future expenses. For its part, GM financed these future costs with a one-time contribution of US$35 billion into a trust fund. The fund will be managed by the union. Income from the fund will pay future health-costs of GM retirees.

By removing from its balance sheet this liability for future costs, GM no longer needs to reserve against such future expenses out of current income. It will become more profitable immediately, or it can cut the prices of its cars to better compete against foreign brands.

The revolution in capitalism inherent in this innovation has two aspects: first, the employer – the capitalist – is no longer put in the position of providing full and fair life-outcomes for its workers. The relationship between capital and labor becomes less adversarial. In classical 19th century capitalism, for the company to gain, its workers must lose, and vice-versa, in a zero-sum competition for a share of enterprise profits. Now, once these future liabilities have been off-loaded from the company to the union, workers - through their union - must look more to their own welfare.

The company can more easily look to the market for pricing signals and brings its costs in line with customer preferences. And from the worker’s perspective, there will be less reason to load all their financial hopes and expectations on the company’s shoulders, forcing it to lose market share through higher costs. With alternative structures protecting their interests, workers can be more market savvy, in line with company needs and objectives.

Second, once unions provide health-care benefits for retirees, they are aligned in concept with provision of other long-term advantages for workers, such as life-long learning, skill enhancements, relocation assistance upon layoffs, etc.

The unions can plan to meet the financial, intellectual and retirement needs of workers more independently and creatively. This challenge, if well met, will give workers new reasons to value union membership as a kind of life-long cooperative to enhance the capital values – skills, educational accomplishment, savings, etc. – that they bring to global competition.

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