Seeking the Wisdom of the Crowd

by publius

Megan McArdle takes a stab at justifying the proposition that GM workers make $70/hour (contra Cohn and Salmon, who say $28). Basically, to get to $70, you have to add in retiree health care. And so here's the part I don't understand:

So from the worker's point of view, it is true, they are not getting $70 an hour worth of value (unless they're very close to retirement). They are making a large personal gift to the retirees in the union. But from the company's point of view, giving all that health care to other people is indeed part of the cost of their compensation. . . .

Now, you could argue that since the retiree cost is fixed, it shouldn't be calculated on an hourly basis. But there are lots of other kinds of fringe benefits that exhibit declining cost to scale--health insurance, for example. So I'm not sure that argument is quite right.

I don't understand this argument. I'm not saying she's wrong -- lord knows I'm not exactly Johnny EconPants. But my understanding of a fixed cost is a type of cost that is basically independent of how much you produce. So retiree health care costs remain the same regardless of how much GM produces. So I don't see how these costs could possibly be included in the hourly wages.

As for McArdle's "cost to scale" argument -- this may be where my ignorance is showing. It may be true that health care insurance (like lots of other types of costs) exhibits economies of scale -- but I still don't see the relevance. How would that fact alone transform a fixed cost into something else?

Again, she may well be right -- I'm hoping someone can enlighten me if I'm wrong. But to me, if retiree health care can be added to the hourly wages, it seems like a lot of other business costs could be added as well, at least under this justification.

Comments

[Sebastian]

I have a question about the health care part of the equation. You become eligible for universal health care (Medicare) at age 65.

Is this crushing burden seriously all people who retired from GM but aren't 65? Or is the universal health care talking point a distraction? Or something weird in between?

[JerryN]

Is this crushing burden seriously all people who retired from GM but aren't 65? Or is the universal health care talking point a distraction? Or something weird in between?

It's my understanding that these retiree health care plans go quite a bit beyond the sort of coverage that Medicare provides. The latest contracts provide for the transitioning of the funding for these plans to independent trust funds. The transition is supposed to be complete in 2010. See this article for some background.