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Wage Arbitrage: The Main Problem of Political Economy

© Carey Goodman

A few years ago General Motors invested EUR750,000,000 upgrading its Opel production facility in Russelsheim, Germany. Russelsheim is a city built to serve the auto industry and was home to Europe's pre-eminent auto engineers during the last hundred years. The new Opel plant was promoted as the world's most technologically advanced auto production facility. Two years after production began, the plant operates at approximately 60% capacity, Opel sales continue to decline, and GM announced it will reduce its work force in Europe by 12,000 people; 10,000 of these will be labor in Germany; 5500 of those 10,000 will be newly unemployed workers from Russelsheim.

What went wrong at Opel? Did GM miscalculate demand? Did auto sales decrease significantly during the last two years? Is high cost German labor simply the latest victim in the growing wage arbitrage problem?

While GM's management of Opel is far from admirable, GM is only partially to blame for the ruin in Russelsheim. Several years ago GM changed its Opel management team. The initial candidate for Opel division executive caused substantial friction with the Opel Works Council and the IG Metall leaders. When GM threatened to reassign the executive and replace him with a less union-friendly candidate, suddenly their old antagonist was IG Metall's favorite darling. Quite suscinctly if IG Metall is unhappy, company management will be unhappy. GM then appointed Fritz Henderson to take charge of Opel on a part-time basis. Mr. Henderson retained his "real job" managing GM operations in Sweden. IG Metall and the Works Council expressed their displeasure with Henderson's appointment, but they resumed the task of making Opel cars it turned out consumers did not want to buy.

The enhancements at the Russelsheim site were Fritz Henderson's undertaking, and they are his debacle. When production began at the new facility, the top-of-the-line Opel Vector comprised less than 5% of car sales in Europe. A new model was introduced, and now Opel overall as a brand comprises approximately 10% to 15% of car sales in Europe. Opel may be guilty of many things, but clearly GM management need not worry about charges of abuse of a dominant position.

These sales declines combine with the more obviously troubling issue of wage arbitrage. Consider this: According to data from the Institute for Comparative Economic Analyses in Hamburg, the average hourly cost to employ an auto worker in Germany is EUR35; the cost per hour for the same worker in Sweden is EUR21; the cost per hour for the same worker in Poland is EUR7. The wage arbitrage problem deepens when the data are extrapolated beyond the EU. The cost per hour for an auto worker in China is approximately EUR0.5. In other words Opel could hire 1.67 workers in Sweden or five workers in Poland or seventy workers in China for what it costs to retain one worker in Germany That is the problem of wage arbitrage in action.