ARBOR WEALTH: Foreign competition, union demands and Jack Nicholson

Staff Writer
The Destin Log

“Going to get me a job…on the Cadillac assembly line.” — from “Cadillac Assembly Line” as performed by Albert King

Whenever I think of labor negotiations, I picture Jack Nicholson in “Hoffa," pounding his fist on the table and shouting at the aristocrats arrayed around him, demanding financial justice for the Teamsters. Nicholson should have avoided Armand Assante and the mobsters he represented, though, as they were crooks who wanted access to the Union Pension Fund.

Demands from the UAW contributed to the decline of the American car industry in the late 20th century. The ever-escalating cost of medical care and foreign competition hurt as well. Currently, many automakers are building plants in Mexico to take advantage of lower wage costs there. But even so, the U.S. auto industry is bouncing back. Last year America’s Big Three combined to make some $19 billion in pre-tax profits.

With profits, of course, comes a demand for wage increases by laborers and their unions. The last time the United Auto Workers had more than a 1 percent raise was in 2011. Negotiations between management and labor begin in July.

Pay raises can impact share prices. Investors understand that if more of a company’s profit is being directed toward labor costs (pay raises), then that can mean a less attractive bottom line. Some argue that employee turnover and dissatisfaction are just as costly, and that granting decent pay increases insures a better quality of work and a happier labor force, which can possibly translate to higher profits.

It’s a fascinating conundrum, especially arriving on the heels of the Great Recession. Many companies feel like they are just now enjoying some breathing room after several years of decreased consumer spending and decades of difficult foreign competition. “The big-three car firms complain that their wage bills are still higher than of foreign rivals, and say they will resist pay rises,” according to a March article in The Economist Magazine. Management in other industries will likely fight to keep the pay level status quo, citing the tenuous economic recovery. Sometimes, though, successful wage demands in industries like fast food can influence management in unrelated businesses to grant pay increases.

“A 10% rise in pay would cut (corporate) profits by 8%, based on official statistics for big American multinationals (large cap U.S. companies),” says The Economist. “Walmart’s shares dropped by 3% on the day (in February) that it announced its pay raise.”

It’s quite a predicament for the American corporation. Everyone, especially corporations, benefits from consumers having more dollars in their pocket, which for most folks only comes from a bigger paycheck. But to give those pay raises to their own employees would potentially hurt their bottom line, their stock price and (for most CEOs), their own paycheck.

Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 —, a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.