Bryan Caplan  

Coase in Detroit

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Suppose you signed a contract to pay a worker $100k a year for life. Then a competitor shows up an offers to do the same job for $50k. You can't get out of the contract. What is the best way to respond to this missed opportunity? The great Coasean insight is that you should offer to split the savings with the overpaid worker if he'll allow you to replace him.

Does this sound like an idea that only an economist could stomach? Think again:

General Motors offered lucrative buyouts Tuesday to 74,000 employees - its entire U.S. hourly workforce.

The nation's largest automaker announced the latest round of buyouts as it reported another loss on its core auto operations in the fourth quarter, which combined with charges taken earlier in the year left GM (GM, Fortune 500) with a company-record $38.7 billion net loss for 2007.

To try to stem automotive losses that have dogged the company since 2005, the company is making a range of offers, up to cash payments of $140,000 to the remaining 74,000 GM workers represented by the United Auto Workers union.

The goal is not to reduce headcount but rather to bring in new workers at a lower cost.

Of course, the same logic applies to immigration as well: If you're locked into an unfavorable deal, the clever response is to offer to split the savings. If the UAW can do the math, why not the USA?


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COMMENTS (13 to date)
Mensarefugee writes:

The problem with your view of immigrants is it views them like goods and services - but people arent goods and services - they replicate, you can stop foreign goods, for good or bad reasons, whenever you want - people already here, not so easy.

Im sympathetic to some of the pro-immigrant stance, but it is overly naive most of the time.

Dr. T writes:

Does GM believe that it can replace its entire workforce this year and keep its productivity at current levels? If so, then either current productivity sucks or current management is using hallucinogens. More likely, current management is dominated by accountants instead of real managers. That also would explain why GM is in such bad shape.

stan writes:

Outsourcing?

Vincent Clement writes:

Dr. T: Unless the contract prevents it, GM could hire those employees back at a lower wage. Plenty of universities and colleges have bought out professors on tenure and immediately hired them back on a contract basis.

The goal is not to reduce headcount but rather to bring in new workers at a lower cost.

This statement is not 100 per cent correct. The lower wages only apply to certain non-core operations. Assembly and tool & die jobs will continue to be paid traditional wages.

If assembly or tool & die employees with 10 or more years of seniority take the buyout or early retirement package, GM will save some money, but it's not that much. The head of the UAW expects a loss of 20,000 jobs. So it is, partially, about a headcount reduction.

Marc writes:

If you have a contractor, that you are paying x amount of dollars yearly and you have found someone to do the work for half, hopefully you have good negotiating skills so you might be able to re-work the contract. However, you are in a contract, a binding agreement; that unfortunately by law, you really can't break unless you go to court.

It's not a bad move by GM to "hedge" their future costs by buying out their employees. $64 billion of GM's debt is the current and future payments of retirees' pensions and healthcare costs. So by buying out these 74,000 employees isn't a bad move. I guess the new revolutionary chevy impala heralded this idea of changing pace and starting anew.

So GM isn't breaking contract, they're reworking them by buying out employees and getting new ones for cheaper. Hopefully they hire brainiacs with amazing tech and design skills that also want to work for much less than other Japanese and German manufacturers might offer.

Marc writes:

In terms of the US doing the same with illegals, I think they don't need to take GM's approach.

First, we need to remember that regardless of the situation, an illegal will ultimately be extradited back to their original country, or at least the nearest bordering one. The US doesn't need to negotiate contracts with illegals. If they worked here, made a livelihood here, yet didn't file neccessary documentation to be here, unfortunately it's tough luck.

You take a risk to get here illegally. You know what happens if you're caught. Granted you can try for asylum, yet that most likely won't happen. I'm here because I was lucky enough to be born on this soil, yet my ancestors filed for paperwork and were properly documented on arrival at Ellis Island. Yes, like many of us Americans, we're here because of luck. So to be a naysayer against the struggle of an illegal, it comes out $hitty, and I agree. However, we have to stand by law, and a rule is a rule.

Therefore, I think that illegals should not have a say in whether they can be eligible to sue for breach of contract. I say they work for what they can, and they have to face that it is unethical for different treatment, yet it is the law.

JmZ writes:

If the UAW can do the math, why not the USA? Since we are on the topic of simple comparisons to improve our nation, can we add that most mom and pop shops have a balanced budget, why not the USA; most westernized countries have universal health care, why not the USA; “green collar” employment, 21st Century Education, green energy plans, etc. etc.

I believe the bottom line here is that GM has finally realized they are in a beat up old Chevy (or Buick, Pontiac, etc.) going downhill fast with no breaks. I applaud GM for trying to right the ship, albeit entirely too late. I truly hope that the good people of Michigan take these not so subtle hints and realize that they have to diversify their economy; they can no longer rely on the big three as their primary source of employment. As for the UAW employees, please take the buyout and run! This may be your last chance to get out of GM with something tangible.

On the brighter side, the UAW employees are mostly skilled laborers who have an opportunity to take this payout and invest it into new-growth areas, start-ups, and entrepreneurial ventures that can have a lasting impact on recreating Michigan’s economy in a sustainable, efficient and hopefully environmentally friendly way. ...did somebody mention immigration?

Steve Sailer writes:

Businesses were doing that kind of thing long before Coase had his insight. When my grandfather, a top international X-ray machine salesman retired at age 55 in early 1929, his employer offered him a year's salary to sign a non-compete agreement to keep him away from the competition in case he got restless in his retirement.

Bill writes:

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Tim writes:

mensarefugee

Once immigrants replicate, their offspring are not immigrants. They're U.S. citizens by virtue of being born here. As such, the children of immigrants, the grandchildren of immigrants, etc., all become part of the human capital of this country -- oddly enough, just like the immigrants who were responsible for you and me.

Lord writes:

It may make sense to offer it, but it doesn't necessarily make sense to accept it.

mensarefugee writes:
Once immigrants replicate, their offspring are not immigrants. They're U.S. citizens by virtue of being born here. As such, the children of immigrants, the grandchildren of immigrants, etc., all become part of the human capital of this country -- oddly enough, just like the immigrants who were responsible for you and me.

Yes, and some have less human capital than others.

Tim writes:

They may have less than others, but it is still a net gain.

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