Boeing Makes a Move

The labor market news coming out of Washington State continues to be interesting.  After voters in the airport district passed a $15 minimum wage, the next major news item was a contract negotiation between Boeing and the Machinists' Union.  Boeing currently builds the 777 wide body jetliner in Washington state.  However, they just announced a series of orders for a newer model of the plane, the 777X.

In order to keep building the new plane in Washington, Boeing renegotiated the contract.  The final offer would extend through 2021 and included several features that would not endear it to the union.  First, the wage increases in the contract were limited to 1% every other year.  Second, the new contract would introduce a two tier wage scale.  Under the current contract, assemblers start at $15 an hour.  after 6 years of annual increases, they top out at $35 and hour.  Under Boeing's offer, the new hires would take 20 years to reach that top rate.

The big enchilada, however, was the pension plan.  Boeing's workforce in Washington is currently covered by a traditional defined benefit pension plan.  With a defined benefit plan, once you retire, your monthly benefit is fixed.  The company bears all of the investment risk of choosing the right investments to make sure enough money is in the plan to make all of the payouts every month.

Boeing proposed to replace that with a defined contribution plan.  Under defined contributions plans, the company agrees to place a percentage of the employee's earnings into the employee's account.  The employee is then responsible for investing that account in such a way that it grows over time.  When the employee retires, the account is theirs to spend as they wish.  Don't spend it all at once, however, because the money has to last you for the rest of your life.

When the contract proposal was put to a vote, th Machinists voted it down by a two to one margin.  Reasons that were cited for the rejection included the fact that the company is highly profitable, and that the CEO of Boeing got a big increase in compensation.  Too bad for the Machinists that those things don't matter worth a squat.

What does matter is this: Boeing can build the new 777X in one of several new locations.  One possibility that was cited was North Charleston, South Carolina, where Boeing is currently starting to assemble 787 Dreamliners.  Although the 787 had a really rough launch, they seem to have gotten past their teething pains.  The workforce now has experience, and the good people of South Carolina would be thrilled to increase the Boeing payroll.

Another possibility is Long Beach, California.  Boeing currently assembles C-17 military transports in Long Beach.  That contract is going to end in 2015, about the same time Boeing will be gearing up for the 777X.  Although unionized, the folks in Long Beach recognize that without a new piece of business, they're toast.  They will be very receptive to Boeing's overtures, because they recognize that the alternative is massive unemployment.

Another area talking to Boeing is Huntsville, Alabama, where Boeing has located their space operations.  Alabama, like South Carolina, is another Right to Work state.

The Machinists' Union thinks they are calling a bluff on the part of the company.  They think that the skills of the workforce in Washington state are unique and irreplaceable.  You used to hear such statements coming out of the United Auto Workers as well.  At least, you did before the Japanese and Koreans opened up a whole series of assembly plants in the US using non-union labor from Right to Work states.

By rejecting the contract offer, the Machinists have gambled the future of their jobs.  I certainly would not cover their side of the bet.  I think they are going to find out their skills are not irreplaceable.  Then they are going to find out that nobody else thinks their skills are useful in any other situation than building aircraft.

Obamacare II

What a difference a month can make.  This time last month the Republican party appeared to be self destructing, having taken the blame for both the government shutdown and nearly causing the US to default on its debt.

Now, the debacle around Obamacare’s healthcare.gov website is controlling the news cycle, day after weary day.  I’ll bet that at the White House, it is all hands on deck.  Everybody coming in every day, preparing for twice daily briefings on the status of Obamacare’s launch.  Too bad none of the staffers can actually do anything constructive about fixing the problems.

The latest wrinkle is that the President has decided that he won’t enforce the law mandating certain levels of coverage, if the insurers would like to rescind some of the cancellations they have already sent out.

See, now you can keep your coverage if you like it, just like the President has been saying all along!

You have to wonder what the state insurance commissioners and insurance companies think about that.  Did anybody ask them?  Or is the spin machine getting geared up to blame the insurers for all the people who will lose their insurance coverage next January if the website is not straightened out?

One of the ironies of this situation is that Obamacare, which was intended to increase the number of people paying for health insurance, may end up significantly reducing the number of insured in this country.

Another irony is that the Republicans went to the mattresses trying to defund, or at least delay the implementation for a year.  I’ll bet Harry Reid wishes he had done just that, right about now.

Increasing the Minimum Wage

The off year elections are over. Chris Christie of New Jersey stokes his Presidential
prospects by cruising to a win as Governor of New Jersey. Bill DeBlasio, an unabashed
tax and spend liberal, kicked the stuffing out of his Republican opponent to become
mayor of New York City.

The most interesting election result to me, however, was a referendum in the city of Sea-
tac, Washington. Seatac is in the Seattle metropolitan area. It gets its name from the
Seattle-Tacoma airport (Sea-Tac), which occupies about 25% of the land area of the city.
Seatac has what is described as a working class population. This probably means that
housing is cheap, so households in the bottom half of the income distribution can afford
it. The tradeoff is that every time a jet lands the windows shake.

The good people of Seatac just passed a law mandating a $15 per hour minimum wage,
the highest in the country. Seattle’s current minimum wage is $9.19, while the Federal
minimum wage is $7.75 an hour. So fast food workers at the airport who live in Seatac
just voted themselves a 63% raise.

The activists behind the campaign to increase the minimum wage were tactically brilliant.
The increase is limited to airport related businesses, and restaurants with more then 10
employees. This means most of the increased costs are being shoved onto travelers who
can presumably put the bills on their expense accounts. Since the area around Seatac is
already pretty built up, businesses will have a hard time relocating to just outside the city
limits to avoid the higher wage costs.

This is a classic union organizing tactic: target a large, immobile concentration of capital
assets. If the capital can’t move, then labor can organize to capture a larger percentage of
the economic value created. In the ‘30’s it was steel mills. Now, the capital asset is the
airport.

This will be a large scale experiment on the effects of a big increase in the minimum
wage. We should see a flow of marginally higher skilled workers across the boundary
of the city line, as better workers apply for the higher paying jobs, and businesses eject
less skilled employers in favor of superior applicants. Some of the Seatac residents who
voted for the increase may find themselves on the losing end of that transaction. Be
careful what you wish for.

We should also see a decrease in the number of employees, as businesses work to reduce
their higher labor costs. One of the most interesting results to watch will be the effect of
the higher minimum wage on people who now make between $10 and $20 an hour. If
you are making $12 dollars a hour today, do you accept your $3 raise and go on? I think
it far more likely that you go back to your boss and demand a bigger raise.

I can hear the conversation now: “Why should I work this (fill in the blank) job. I can go
to McDonalds and get the same money.” And because businesses have to compete for
even moderately skilled workers, wage scales will increase from top to bottom. What
I don’t know is whether the push back will be based on a fixed dollar gap or a fixed
percentage gap.

In other words, does the guy who is making $15 an hour today ask for a 63% increase to
$24.45? Or will he settle for a $7 increase up to $22.

One thing is for sure: I'm glad I don't own a business in Seatac

Obamacare and Private Insurance

Despite being repeatedly told that you can keep your health insurance coverage if you like, hundreds of thousands, if not millions of Americans are getting cancellation notices in the mail.  It turns out that a lot of health insurance in the private market doesn't meet the definition of what the political appointees at HHS consider adequate coverage.

Maybe the problem is that it does not cover what the regulators think it should.  Because everyone, and I do mean everyone, needs maternity coverage.  If you don't believe me, just ask them.

Or maybe the deductible is too high.  The news coverage I have read is that the limit is $6000.  Higher deductibles than that are being outlawed.  I guess if you have $6000, and are in perfect health, that doesn't really matter.  You can't accept that risk in exchange for lower premiums.  Because someone in Washington decided they knew better than you.

Predictably, many of the people whose policies are being cancelled are finding out new coverage will cost considerably more going forward.  However, they're being told they shouldn't complain, because their new coverage is better, even though it costs more.  It covers more conditions, and kicks in earlier.

This reminds me of what the cable company tells me when they raise my price every year.  "Sure, our price went up 6%.  But look how many more channels you are getting."  News flash for you, buddy: I neither need nor want twelve versions of the Golf Channel.  Golf Grudge Match channel: this time it's personal!  What's up with that?

That's what you get when you hand things over to a monopoly.  And at least I can understand the reasoning of the cable company.  They're trying to maximize their profits.

But Obamacare was advertised as the way to lower prices.