Coase in Detroit
Suppose you signed a contract to pay a worker $100k a year for life. Then a competitor shows up an offers to do the same job for $50k. You can’t get out of the contract. What is the best way to respond to this missed opportunity? The great Coasean insight is that you should offer to split the savings with the overpaid worker if he’ll allow you to replace him.
Does this sound like an idea that only an economist could stomach? Think again:
General Motors offered lucrative buyouts Tuesday to 74,000 employees – its entire U.S. hourly workforce.
The nation’s largest automaker announced the latest round of buyouts as it reported another loss on its core auto operations in the fourth quarter, which combined with charges taken earlier in the year left GM (GM, Fortune 500) with a company-record $38.7 billion net loss for 2007.
To try to stem automotive losses that have dogged the company since 2005, the company is making a range of offers, up to cash payments of $140,000 to the remaining 74,000 GM workers represented by the United Auto Workers union.
The goal is not to reduce headcount but rather to bring in new workers at a lower cost.
Of course, the same logic applies to immigration as well: If you’re locked into an unfavorable deal, the clever response is to offer to split the savings. If the UAW can do the math, why not the USA?