Automakers are flooding to the Deep South for cheap, union-free labour

State of the anti-union

by Tamsin McMahon in Maclean’s, Thursday, April 5, 2012

State of the anti-union

When German executives from Volkswagen descended on Chattanooga, Tenn., last May for the grand opening of their $1-billion plant, they pointed to the warm Southern hospitality and the cultural amenities of life on the banks of the Tennessee River as key reasons for deciding to build their first North American auto assembly shop in 20 years on the site of a former wartime-era munitions factory in the Deep South.

Auto industry analysts pointed to other reasons the automaker chose Chattanooga: the region’s high unemployment and strong anti-union sentiment, which promised both a massive labour pool willing to work for cheap and more than half a billion dollars in government incentives—nearly $200,000 per worker. Luring Volkswagen, which promised to hire nearly 2,000 workers for as little as $14.50 an hour, was deemed a huge coup for the city of 170,000. Since the plant opened, the city’s unemployment rate has dropped from nine per cent to 7.3 per cent. Volkswagen-branded shirts became the city’s most coveted fashion item.

Volkswagen is merely the latest foreign automaker to target the southern U.S. for expansion into the North American market. It’s a trend that is profoundly reshaping the American manufacturing landscape, pushing the country’s auto belt south from Michigan and Ohio into the cotton fields and cow pastures of Alabama and Mississippi in search of cheaper labour and fewer costly union battles. It’s not the first time the industry has seen a shift to the South, as automakers decamped for places like Kentucky, Tennessee and Missouri in the 1980s in search of cheap labour. But the present-day move appears both more profound and more lasting. For every job created by foreign automakers, mostly in the South, the Detroit Three have shed six jobs, nearly half in Michigan, according to the Center for Automotive Research. It’s a push that now threatens the future of high-paying manufacturing jobs in Canada, and maybe even the future of unionized workplaces.

The bankruptcies of General Motors and Chrysler and the rise of foreign automakers, almost exclusively heading to the southern states, have forced a steady stream of concessions from the United Auto Workers union, including multi-year pay freezes, major changes to benefits and pensions and so-called two-tier wages, where new hires at the Detroit Three make roughly half the hourly wages of their coworkers and, in some cases, less than their southern counterparts. Contracts with Ford, GM and Chrysler now start as low as $14.78 an hour. Some predict U.S. auto wages could fall even further.

“If Chrysler is receiving 10,000 applications for jobs at the lower-tier $14 per hour wage, that’s one indication that $14 per hour is still too high,” University of Michigan economist Mark Perry wrote in his blog. “That is, Chrysler could offer to pay less than $14 and still have an excess supply of workers.”

It’s not just manufacturing wages that have been under assault as the U.S. struggles to dig itself out of recession. Recently, legislators in Florida and Arizona debated slashing the minimum wage of restaurant servers to below $3 an hour as part of their strategy to be “open for business.”

“There is a race to the bottom that has been playing out sporadically in the United States for decades,” says Greg LeRoy, executive director of Good Jobs First, a watchdog that tracks how states use financial incentives to attract companies. “The difference we see right now is because the number of major deals is depressed, the ability of companies to play states against each other, what we call job blackmail, that activity is up.”

All of that has made Canadian workers, for years the poor cousins to their U.S. counterparts, seem overpaid by comparison. The Center for Automotive Research in Michigan calculated that Detroit UAW auto workers now cost $7 an hour less than their Canadian counterparts, a discrepancy that has only been exacerbated by the strong loonie. University of Windsor business professor Tony Faria estimates that with benefits, Canadian auto workers cost as much as $12 an hour more than Americans. Data from Cerno Research, a division of Owen Media Partners and Compdata Surveys, which tracks manufacturing wages, show the average pay differential for Canadian manufacturing workers runs anywhere from $2.80 an hour for warehouse employees to $9.13 an hour for production equipment operators. Where Canadian manufacturing workers differ the most from their U.S. counterparts is on the top end of the pay scale. In Canada, machine operators make as much as $40 an hour, compared to just $17 in the U.S. “We’re out of whack right now,” says Faria.“We really can’t compete with Mexico. But we can and we do have to compete with hourly wage rates in the U.S.”

That discrepancy is hitting us where it hurts. Last year, automotive manufacturers invested more than $1 billion in the U.S. and virtually nothing in Canada. This February, auto production surged 57 per cent in the U.S. and just four per cent in Canada. Canada’s manufacturing trade surplus with the U.S. has gone from $66 billion in 2002 to $20 billion in 2011. Our trade deficit in manufacturing with the southern U.S. has grown from $1.8 billion in 2002 to almost $10 billion last year.

The Canadian-bred CEO of Chrysler, Sergio Marchionne, made it clear he expects the company’s Canadian workers to make the same concessions as their counterparts across the Detroit River in contract negotiations with the Canadian Auto Workers this summer. “We will not tolerate a differential in cost positions between Canada and the United States,” he told the North American International Auto Show in January. “I lived through the introduction of the Free Trade Agreement. I lived through the loonie that was worth more than the U.S. dollar. I lived through one that was worth 60 cents. We all know how we got there. We all know how we maintain competitiveness in those times.”

It’s a reality that hit home last month, when U.S.-based Caterpillar shut down its Electro-Motive factory in London, Ont., after asking its 450 workers to slash their $30-an-hour wages in half. The company later shifted production to Brazil and to Muncie, Ind., where legions of unemployed workers lined up to earn a starting wage of just $12 an hour. “For many workers in a state like Indiana, you have a reserve army of people who are willing to work for pretty low wages just to put food on the table,” says Robert Scott of the D.C.-based Economic Policy Institute. That is sending a message to unionized workers in southern Ontario: be afraid.

Since attracting Mercedes-Benz in 1997, Alabama has built one of the largest automotive industries in the country out of virtually nothing. The state is now home to both Honda and Hyundai. When Toyota was looking to build its first V8 engine plant outside of Japan, it chose Alabama for the $200-million factory.

The state has added roughly 15,000 automotive assembly jobs since 2000; now Alabama is poised to become the country’s third-largest auto producer.

And there remains a seemingly inexhaustible supply of workers. Last July, the employment agency tasked with finding 500 temporary Mercedes workers to build SUVs for $14.50 an hour—a job requiring at least two years’ manufacturing experience—had nearly 4,000 applicants before it had even opened the doors of its Tuscaloosa office.

Southeastern states have among the lowest cost of living and the lowest energy costs in the U.S., making it comparatively easy to work for what amounts to a few dollars above Ontario’s $10.25 minimum wage. (The average home in Alabama sells for just $133,000, compared to $372,000 across Canada.)

But beneath the lure of cheap labour is another issue that has helped push America’s manufacturing heartland to the south, one that is quickly reshaping the industrialized labour movement in the north. Just five days before Caterpillar moved its operations to Indiana, the state became the 23rd U.S. state to enact so-called right-to-work legislation, which makes it optional for employees in unionized workforces to join the union or pay dues.

In courting Volkswagen, Tennessee officials relied heavily on their state’s anti-union legislation. “We are a right-to-work state with extremely low business costs,” Chattanooga’s economic development organization wrote in a presentation to car company executives. “Our large labour pool and lower union participation add up to savings you can bank on year after year.”

Union participation has been on the front line of the war for U.S. jobs. The right-leaning National Institute for Labor Relations Research in Virginia found that in the past decade employment grew in right-to-work states even as it fell in others. The Martin Prosperity Institute found that the fastest post-recession job growth has been in cities with the lowest levels of unionization.

The UAW, whose share of auto assembly plants and their workers has fallen precipitously since the 1980s, knows just how serious an issue right-to-work legislation has become for the industry, and just how much the southern states are shaping the future of automotive manufacturing. The union has organized several drives to unionize southern plants, including passing out signature cards to 800 new employees at Volkswagen in Tennessee this month and organizing an “open house dialogue” at Mercedes-Benz in Alabama this week.

The automakers have responded by throwing perks at their employees. At Mercedes in Alabama, workers get regular profit-sharing bonuses in the thousands of dollars, as well as health benefits, a subsidized onsite daycare and the ability to lease a Mercedes car at a discount. Few workers seem interested in joining a union, says Steven Allen, who worked inside the plant for years for a supplier. “They were proud to work there. They’re told when they’re hired that they’re the best, and if people don’t work there it’s because ‘they’re not good enough and you are.’”

Right-to-work legislation, which has existed since the Second World War, has quickly become one of the most hotly debated topics in state legislatures as they look to coax companies across their borders. Missouri, which is suffering its own downturn in manufacturing employment, is in the midst of a debate over right-to-work laws. And even lawmakers in Michigan—the embattled heartland of the American labour movement—have been pushing for such laws, with polls showing as many as 60 per cent of voters supporting them.

The public debate over the future of unions tends to come and go in tandem with recessions, according to Mark Sweeney of McCallum Sweeney Consulting, a South Carolina site selector that helps manufacturers in both Canada and the U.S. decide where to set up operations. But Sweeney thinks the tide of U.S. public opinion may have permanently turning against organized labour. “The pendulum swings depending on the economy, if unemployment is high or if there is full employment,” he says. “But I suspect this is a bit more than a pendulum swing. It might be a reconsideration of the whole concept of labour management compared to what it was 100 years ago.”

Not surprisingly, Sweeney says, almost all his manufacturing clients prefer to run non-unionized workplaces, with about half insisting that they won’t even consider areas that don’t have right-to-work laws. There are always other considerations for companies looking to set up across the border in Canada, but companies are avoiding locations in Ontario in favour of right-to-work states, Sweeney says. “If we’re starting out early and somebody says we’re looking in the eastern half of the U.S. and Canada for manufacturing and we’re interested in a non-union environment, [Ontario] could be subject to that same kind of early decision-making,” he says. “It’s a really touchy situation for policymakers and it’s not an easy situation. But just because it’s not easy doesn’t mean that it isn’t the way these decisions are being made.”

Ontario and Alberta both flirted with the idea of doing away with mandatory union dues in the 1990s. Saskatchewan Premier Brad Wall mused about making dues voluntary during last year’s provincial election. But there has not been a serious political push to introduce American-style right-to-work laws in Canada. Still, the country’s largest private sector union is watching the issue closely as it heads into contract negotiations. “America is the only country in the industrialized world where someone in a high-skilled, high-value, heavy industry will work for a poverty-level wage,” says Canadian Auto Workers economist Jim Stanford. “Does our government actually think it’s a good idea that high-skilled manufacturing workers should be paid $12 an hour? If they think so, then just stand back and let this continue to happen.” Like it or not, they may have no choice.

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