GM/UAW Driving Health Care in Wrong Direction

by David R. Henderson and Charles L. Hooper
by David R. Henderson and Charles L. Hooper

The conventional view that comes up every Labor Day is that labor and capital are engaged in a life-and-death struggle for the fruits of their combined production. But this Marxist stereotype belies a more-important reality: that labor unions and unionized firms often conspire against the broader interests of the country. One recent case in point is General Motors’ and the UAW’s drumbeat about the high cost of health care. GM has gotten sympathy for a number of years now by computing its health care costs per car sold – currently a whopping $1,500. At the same time GM is competing with foreign-car companies whose health care costs are government subsidized. By spending less on their employees’ health care costs, claims GM, these foreign car companies "are able to spend money on bringing new products to market and building new plants in the U.S."

Fortunately, GM is not pushing hard for restrictions on car imports. And GM knows it won’t change health policy in Germany and Japan. What’s left, so to speak? Changing health care policy in the United States. While GM hasn’t yet come out in favor of socialized medicine, GM seems enamored with Canada’s Medicare system. "The Canadian plan has been a significant advantage for investing in Canada," said GM Canada spokesman David Patterson. And United Auto Workers president Ron Gettelfinger wants a socialized, "single-payer," taxpayer-funded health care system in this country.

Even if we ignore the fact that GM agreed to these high health-care costs (GM motto: stop me before I negotiate again), GM’s logic is hopelessly flawed for two reasons.

First, even though employers pay for health care, the real cost of health care is borne mainly by employees. Because the employers actually write the checks each month, health care for GM employees looks like a gift. It’s not. Economists have long understood that supply and demand plus bargaining power dictate an employee’s overall wages plus benefits. If GM’s workers are paid $50,000 a year and health care per employee costs, say, $7,000, then GM won’t hire anyone whose productivity is less than $57,000. (We’re assuming away, for simplicity, other non-wage benefits.) Benefits don’t magically make employees more productive. So if GM managed to bargain health-care costs per employee down to, say, $5,000, then, unless this reduced the power of the union, pay would rise to $52,000. And what data we have basically fits the economic theory. Although economists have done little empirical work on who actually pays for contractually agreed upon employer-provided benefits, they have estimated who bears the burden of mandated benefits. MIT economist Jonathan Gruber and Princeton economist Alan Krueger found empirically that for every dollar of government-mandated, employer-provided benefits, wages are 56 to 85 cents lower. That they are not 100 cents lower is probably due to the fact that workers don’t value mandated benefits at 100 cents on the dollar.

Second, GM gave away the argument by pointing out that foreign car companies are building plants in the United States. Neither Japanese nor German governments subsidize health care costs for these foreign car companies’ workers in the U.S. So somehow these companies are able to pay for employees’ health insurance and still compete effectively with GM. Maybe that’s the lesson that GM and the UAW ought to contemplate this Labor Day.

And the UAW ought to reconsider its support for socialized medicine. For a switch to socialized medicine to save money, prices to providers would have to be kept low. At these low prices, and given the zero out-of-pocket prices that patients typically pay under socialized medicine, there would be queues and line-ups. In short, socialism "saves" money by rationing health care. And it rations by restricting technology and supply and by causing people to wait in line. Great Britain’s National Health Service, for example, has a waiting list of up to 18 months for one-on-one counseling for depression. This long wait is a real cost to those people who need help. The National Health Service’s solution: recommending self-help books for patients with mild to moderate depression and anxiety. Clever solutions like this reduce the amount of money that the British spend on health care but they probably increase the total cost of health care. If that sentence seems like double-speak, just remember that total costs are monetary costs plus pain, suffering, death, hassles, and waiting. The ultimate way to reduce health care expenditures is to not provide any medical care, whatsoever.

Ironically, such queues are not clearly in the interest of GM workers. Line-ups cause a special hardship for the elderly, because health status declines with age and use of the medical-care system rises with age. And GM employees and retirees are disproportionately old. Moreover, currently employed unionized GM workers are among the highest-paid workers in the country and, therefore, would bear a disproportionate share of the tax cost of funding socialized medicine, given our government’s progressive tax system. This may be in the interest of GM retirees, who are lower income, but would probably hurt, on net, active GM employees.

September 2, 2005

David R. Henderson [send him mail], formerly the senior economist for health policy with President Reagan's Council of Economic Advisers, is a research fellow with the Hoover Institution. He is author of The Joy of Freedom: An Economist’s Odyssey. Charles L. Hooper, president of Objective Insights, a company that consults for pharmaceutical and biotech companies, is a visiting fellow with the Hoover Institution. Their new book is Making Great Decisions in Business and Life (Chicago Park Press, October 2005.)

Copyright © 2005 by David R. Henderson and Charles L. Hooper. Permission to reprint or use in any way is hereby granted as long as the authors and title are cited.

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