Auto industry subsidies should be contingent on worker pay cuts

Montreal—Governments should require competition wages as a condition for subsides and bailouts to the auto sector, according to a new study a study from the Montreal, Que.-based Institute for Research on Public Policy.

The Economics of Assisting the Automotive Sector in Canada examines whether auto industry subsidies and bailouts are a cost-effective way of fostering economic development in Canada and the conclusion is that pay concessions by auto-workers would free up a lot of cash and enable the best outcome for the economy.

“Despite the relatively minor share of productivity growth that is attributable to labour, workers in the Canadian automotive sector enjoy significantly higher pay than doest he average manufacturing worker,” the study explains. “Assembly workers in particular (as opposed to workers in the parts industry) enjoy roughly a $10 hourly premium compared with the average manufacturing wage. Although some of this gap may reflect industry-specific skills, we attribute most of this pay premium to union bargaining power.”

Combined, the federal and Ontario provincial governments gave $1.4 billion in subsidies for auto industry projects since 2004. According to the study, it would have been possible to replace the entire value of the subsidies with “relatively modest concessions” in pay, authors Leslie Shiell and Robin Somerville wrote.

Pay concessions would not have covered the entire cost of the net cost of $9.5 billion in bailouts handed to General Motors of Canada Ltd., and Chrysler Canada Inc., in 2009, they added. However, $6 billion would have been generated if auto-workers’ wages had been decreased to rates on par with the rest of the manufacturing industry, and would have reduced the burden on government and thus taxpayers — many of whom earn much less than auto-workers — to supply the rest.

But overall Shiell and Somerville say the cost of the 2009 bailout was lower than the economic costs that would have resulted without it. If both companies had not been bailed out and closed their Canadian operations, there would have been immediate losses of about $23 billion in gross domestic product (GDP), with $16 billion being in Ontario.

One hundred thousand jobs would have been lost overall, with GM and Chrysler workers accounting for 18,400, while the remaining 81,000 would have been lost elsewhere in the economy. So while the cost was worth it, a better outcome could have been achieved by requiring auto-workers to lose the $10 premium they have over workers in other manufacturing industries. And subsidies are not the most equitable or cost-effective way to attract auto investment to Canada, the authors wrote.

“…subsidies come at a high cost to society, as they must be financed through distortionary taxation,” they wrote. “In effect, the total cost of any subsidy program ( ubsidy plus tax distortion) exceeds the face value of the subsidy itself. Therefore the best outcome for society would be to minimize the scale of investment subsidies the government must offer to win internationally mobile investment projects.”

Lower wages as well as the higher Canadian dollar are the reason new automotive investments go to the southern U.S. and Mexico, the authors wrote.

However, Jim Stanford of the Canadian Auto Workers says hourly wages of auto-workers in Canada is on par with those in the U.S. and other countries.

“The wages are justified because of the worker’s contribution to productivity,” he said. “Trying to cut wages in the name of attracting investment would be self defeating.”