Pair auto subsidies, pay cuts

Leslie Shiell, Robin Somerville April 20th, 2012
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As the Canadian Auto Workers union launches a new campaign for a “National Auto Policy” ahead of negotiations with the Big Three automakers, the time has come to reconsider the ongoing subsidization of the automotive sector.

Most Canadians remember vividly the bailout of General Motors’ and Chrysler’s operations by the federal and Ontario governments in 2009. In a new study published by the Institute for Research on Public Policy, we show that the bailout represented a good policy choice compared with the alternative of losing the Canadian operations of these companies. In particular, the cost to the public purse – at $14.4 billion – was substantially less than the economic losses that would have resulted without government intervention – about $20 billion in 2009 alone. The same is true of the roughly $1.4 billion worth of project-based subsidies which have been awarded to automotive companies in Canada since 2004.

At the same time, because autoworkers earn a significant pay premium over similarly skilled workers in other manufacturing industries, subsidies to the auto manufacturers are in fact subsidizing above-market wages. In addition, subsidies also lead to distortions in the economy through the disincentive effects of the taxes required to pay for them – disincentives for individuals to increase their work effort and disincentives for companies to invest. As a result, the total economic cost of the subsidies is greater than their face value.

It follows that total economic value for Canadians would be increased if workers earning above-market pay levels made concessions on pay, thus enabling governments to reduce the value of subsidies by an equivalent amount.

Wage concessions are also more equitable than subsidies when the affected workers earn above the average income level. For example, based on data from Statistics Canada, we estimate that the average auto assembler earns approximately $70,000 per annum, compared with average annual market income of approximately $48,000 per worker in Canada.

Critics disagree with the notion that wage concessions should be a precondition for auto subsidies and argue that auto-sector wage premiums in Canada are comparable to those in the U.S. and other auto-producing countries. In this view, the high wages are justified because of the workers’ contribution to productivity.

The problem with this argument is that growth in the automotive sector over the past few decades has not been driven by changes in the workforce, such as education or experience levels, but by changes in the organization of the industry and in technology. Moreover, other countries are also grappling with the same challenges as Canada, where large pay premiums have been accompanied by large demands from the companies for subsidies.

It is simple arithmetic to show that wage concessions are worth something to the companies. Therefore, wage concessions should result in a reduction in the level of subsidies required to secure the related investments.

Of course, we fully expect workers to resist calls for concessions on pay. Nonetheless, requiring competitive pay levels would ensure that workers and other stakeholders consider subsidies as a last resort, rather than as a substitute for private actions.

Critics also raise the spectre of a “race to the bottom,” in which Canadian workers are forced to compete with the survival wages earned by workers in other countries. But in reality there is no race to the bottom – only a race to differentiate ourselves from others in the global market place. Indeed, recent reports on the Canadian labour market describe a skills mismatch in which many jobs remain unfilled even while some workers remain unemployed.

In the current climate of global economic uncertainty, industrial subsidies may be seen as a simple and direct way to protect jobs and living standards, but they seriously risk delivering less than they promise. Especially now, with the renewed focus on eliminating budget deficits, the reliance on industrial subsidies in the automotive sector should be reassessed.


Leslie Shiell is an assistant professor in the Department of Economics at the University of Ottawa and Robin Somerville is a director with the Centre for Spatial Economics. They are the authors of the new study “Bailouts and Subsidies: The Economics of Assisting the Automotive Sector in Canada,” published by the Institute for Research on Public Policy.