09/26/2007 12:17 am ET Updated May 25, 2011

Outsourcing and the UAW Strike

Here's what you need to know about the United Auto Workers (UAW) strike against General Motors. The strike was about two things: labor arbitrage and health care.

In 1990, GM's workforce was over 350,000 strong. Today it is 73,000. Much production has been off-shored or spun off. (Delphi, for example, was spun off to supply car parts.) The spun-off workers have taken it on the chin in terms of wages, with Delphi workers going from $27 an hour to a maximum of $18.50."

Meanwhile, the union says the strike was primarily about labor arbitrage, to whit:

The UAW wants assurance of future production at U.S. manufacturing plants.

But the Detroit Three -- GM, Ford and Chrysler -- have threatened to close plants and cut jobs to try to stay afloat....

...The union is holding out for job guarantees for the GM's 73,000-strong workforce -- which is now just a fifth as large at it was as recently as 1990.

In other words, GM workers don't want what jobs are left in the US to be outsourced, off-shored, or spun off.

GM has a number of fundamental problems. The most important one is that their engineering culture is sick -- they do not make cars as good as most of their foreign competitors'. This arises from the fact that GM thought they were in the finance business, not the auto business -- a very dangerous mistake their greatest rival, Toyota, has never succumbed to. (But which is typical of US MBA-style management.)

However GM also has some simple bottom line issues. Unionized American workers are more expensive. Health care costs are out of control. (GM may have 73,000 workers, but it has 270,000 retirees!) The dependency ratio (the number of people each worker has to support) is therefor crippling. And with health care costs rising faster than inflation for, well, nearly forever, those costs are likely to continue as a monkey on GM's back -- unless it can shed them. So, setting up a trust fund, to be managed by the union, and offloading the liability is in GM's interest and will, after the lump payment, get the monkey off its back.

However, agreement on a framework for dealing with the health care issue has apparently been reached, so while it's important to GM, it wasn't the main cause of the strike. The main cause is keeping jobs in the US.

And it's really just this simple: there's no reason for GM to do so other than that it has sunk costs and expertise in the US. As each plant obsolesces, the temptation is to build a new plant overseas, or to farm out that production to an overseas firm, who instead of paying $27+/hour is paying dollars a day.

And that, ladies and gentlemen, is practically the definition of labor arbitrage -- transfering jobs that cost (the employer) a lot to do in America, to someplace cheap where they can be done for less. The difference is pure profit (or, in the case of GM, reduced loss).

The ultimate logic of free trade as it is currently being practiced (i.e., not as free trade, but as trade managed by central banks) leads to an unending flow of labor arbitrage.

Or so the theory goes. In fact the heyday of labor arbitrage is coming to an end. But it isn't quite ended yet, and that's why the UAW is trying to save their jobs. And make no mistake, they are absolutely right to strike for job guarantees. Without them, in another ten years they'll be lucky to have 35,000 GM workers in the US.

As for health care costs, well, that's what you get for having employees in the US. Either they do without, or you pay through the nose to insure them. In most other first world countries the government bares most of the cost, which is why GM, Ford and Chrysler sent the Canadian government a letter saying that Canada should, under no circumstances, scrap Canadian medicare. Because, boys and girls, one reason Canada ate America's lunch in the 2000's was because of off-shoring -- to Canada -- where the natives speak English, and are better educated. (Toyota decided to put a plant in Southern Ontario rather than the Southern States in part because they didn't want to have to train workers using picture books.) And that's because Canada has some of those nasty socialist policies that are supposed to reduce competitiveness -- but instead, in the right doses, increase it.

And so, the Teamsters declared that they would honor picket lines and deliver no GM vehicles for the duration of the strike. The UAW was absolutely right to strike, and I urge people to support them.

But in the end, the problems that the UAW and GM are facing are deeper than one industry or one strike, and have to do with how the US and world economies are structured. Until those problems, which include the American management style, are fixed, expect the long decline of American manufacturing, and the American middle class, to continue, interspersed by fierce little rear guard actions like this strike.