What’s wrong with $70 an hour?
There seems to be a bit of angry-meme competition on the web amongst commentators with respect to how much a GM employee costs - currently circulating at about $70/hour.
James Surowieki was the first I read, stating:
… you only get to that number if you include all of the costs G.M. is paying for retired workers. It has nothing to do with what an actual G.M. assembly-line worker makes.
He got primed for his mini-rant from an article Felix Salmon wrote where he said:
… perpetuating the meme that the average GM worker costs more than $70 an hour, once you include health and pension costs. … is a ridiculous number obtained by adding up GM’s total labor, health, and pension costs, and then dividing by the total number of hours worked.
You can see more of the ranting from Jonathan Cohn at the New Republic and Dean Baker at The American Prospect. You might have even seen the $70/hour cost tossed around when authors complain about the mismanagement of the Big Three.
I’ll start by saying, I quite enjoy reading the posts by Surokieki, Salmon and Baker, and I threw in Cohn’s post to make it an even four.
What I don’t understand is how these economists and policy wonks can get so wound up about this number. I agree that this number is easy to misuse by reporters that have little to no business or economic sense. You throw a basic number out to the press and it is bound to be screwed-up, mismentioned and spun around without any context - you have to expect this because most reporters have no ground-floor expertise in the topics they cover.
This $70/hour (actually slightly over $73) cost is what’s called the fully loaded cost per employee. It’s used by business owners and their competitors to benchmark how efficient they are being with their costs and employees, and every industry uses the metric slightly differently.
In Oil & Gas where I’ve worked in the past, the cost per employee is quite high (given the nice price of oil lately) and tends to be a less important metric given how capital intensive the industry is. In software, where I spend most of my time now, the cost tends to be a 2-digit percentage above salaries, and is a critical measurement in determining competitiveness. Regardless of the industry, it’s a valid way to compare efficiency.
Currently GM has fully loaded costs of $73/hour of employee time. Toyota/Honda/Nissan have fully loaded costs somewhere $48/hour. GM pays an average wage of $28/hour. Toyota/Honda/Nissan pays roughly $25/hour.
The latter numbers mean that while wages are within 15% when compared between the two companies, the former shows that GM is massively less efficient when it comes to employing people, especially since they have agreed to pensions that put their employee costs over the top. It is a very illustrative statistic that shows the magnitude of the problem that GM and the Big Three face. And no amount of bookingkeeping footwork - by shifting the pension liability to another corporate entity - is going to change the size of the problem.
Salmon’s final statement:
But it won’t mean anything, unless you’re trying to be deceptive.
shows shallow business acumen.
In the end, it leads me to believe that Baker, Surowieki and especially Salmon haven’t actually run a company before, where they had to compare efficiency across their competitive landscape. If they had, they’d be annoyed at the ineptitude of reporters more than they are at the use of a valid business metric. If the use of the statistic is inappropriate then complain about the use, otherwise you come off sounding as incompentent as the people you rail against.
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