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Wheels come off due to health care costs
22nd July 2008
What is the main cost of producing a new car for the US automotive giant General Motors? It is a question I could routinely ask of my introductory economics class this autumn when we think about the basics of supply. The likely answers might include the cost of steel, wages of assembly workers, glass and rubber, design costs and the expense of fixed capital machinery for the production line.
In fact the answer is health care!
Speaking at the launch of the UK motor show in London, a senior executive at General Motors has admitted that the cost of providing health care adds from $1,100 to $1,500 to the cost of each of the 4.65 million vehicles GM sold last year and that GM spends more on health care than it does on marketing its vehicles.
It is a good example of how providing employee benefits can add substantially to the overheads of a business and affect competitiveness in a truly global industry. GM has for many years offered fully paid health insurance, retiree medical coverage and pensions. But as the ratio of retired to current employees continues to rise (it is now nearly two to one) GM is scrapping healthcare cover for all its retired workers and for their families from the beginning of next year.
The trade unions are furious but the very survival of the business in in question. As Paul Ormerod tells us in his excellent book “Why Most Things Fail”, the vast majority of the industrial giants at the turn of the last century are no longer in business.
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.