The automobile industry has brought the United States economic growth due to the impact that automobiles have made on society. There has been a plethora of jobs associated with the auto industry, including manufacturing, auto repairs, insurance, and the development of roads, sales, and auto parts to enhance vehicles. Cars, trucks, and SUVs’ have become a way of life for people and have made an additional economic impact by becoming the primary means of transportation for consumers to commute to and from work, vacations, and travel between destinations.
Most family households live on a budget and they must make the decision of how much of their budget they can allocate to transportation costs. The automotive industry is considered elastic as the prices fluctuate depending on supply and demand. This product, the automobile, has become a necessity of life in current day, whereas at its inception, owning a vehicle was a luxury. At that time, because there were other means of transportation the automobile demand was low making the price of autos elastic.
As the auto industry grew over the years the demand became increasingly higher, more so when there was the onset of different makes and models of vehicles. While the demand for vehicles increased, the price remained stable for a time making the demand inelastic because there was not much change in the price. In current times consumers can choose from a vast amount of makes of vehicles with as many models that although the auto itself has become a necessity, some cars could be considered a luxury. For instance, it may be necessary to own a vehicle however, not a necessity to have it equipped with a sunroof, navigation systems and DVD players.
Another factor that directly affects the supply and demand of autos is the price of oil inflating fuel cost so less of the population is purchasing automobiles. This directly affects the manufacturing of how many vehicles are being produced. Therefore, the price of cars increases because the demand is low making the price elasticity of demand elastic. Consumers are purchasing more fuel-efficient A Nation on Wheels 3 foreign cars, which are an alternative substitute, allowing consumers to still have the new car they desire at a lesser cost.
Some American consumers have difficulty buying foreign made imports but because having a car is a necessity to most people, many have had to purchase what best suits their personal and financial needs. The price elasticity of supply in the auto industry is dependent on how many of certain types of vehicles are available. For instance, currently with high fuel prices, gas guzzling SUV’s and trucks are not in great demand. However, the automakers have plenty of them. It would be common to think that they would be offering discounts, rebates and early lease turn in deals in an effort to sell their supply, but this is not the case.
General Motors and Chrysler have announced that they will no longer be in the leasing business. This is due to the high residual values that were placed on many of the vehicles giving consumers a low payment to fit within their household budget, now that these leases are coming in GM and Chrysler are taking a large loss and are having difficulty selling the used vehicles. Ford on the other hand has not yet gotten out of the leasing business yet, but they are not making leasing attractive to consumers and are offering better incentives to purchase a vehicle.
Some consumers are of the opinion that the price of vehicles has been inflated for such a long time that the car companies are offering incentives to make the consumers feel like they are getting a great deal, but truly they are purchasing the vehicle for what it should be sold for. The auto companies may do this for a while longer but eventually they will have to begin bringing the car prices down because typical household budgets will not accommodate a four, five or six hundred dollar car payment. The auto industry and owning a vehicle has benefits to the economy that are considered positive externalities.
Positive externalities exist when the benefit to society is greater than the benefit of a decision made by the auto companies. Some positive externalities in the auto industry would be continued employment of not only manufacturing jobs but auto repair, service A Nation on Wheels 4 stations, retail sales, and lower costs in the economy due to the ability to transport goods. On the other hand negative externalities such as pollution, traffic congestion, time in repair shops, environmental damages and accidents exist.
The transaction of purchasing a vehicle is a positive externality because it has a greater benefit to consumers than the cost of making the vehicle. Effects are positive to the economy for reasons such as keeping people employed. By keeping people employed they make more money, they spend more money, some households would have an opportunity to have 2 vehicles and having an auto makes consumers mobile and productive. According to the United States Bureau of Labor Statistics more than one half of the U. S. autoworkers are employed in the Midwest.
The states of Michigan, Indiana, Ohio, Wisconsin, and Illinois make up the Midwest Region, the leader in the automotive industry. This region also has the industry’s highest wages: since 1992, Midwest auto parts producers’ average weekly wages have been at least 30% higher than those of their Non-Midwest counterparts. (2007) Employees of the Big 3 automakers, General Motors, Ford, and Chrysler have enjoyed the benefits of high hourly wages and often time unlimited overtime. Because they belong to the United Auto Workers Union, most of these workers have also received regular pay increases as well as cost of living increases.
The recent economic conditions have caused a massive slowdown in consumers purchasing autos, which in turn has affected the automotive job market. All 3 of the automakers as well as companies that are related to the auto industry, have been downsizing the number of employees due to falling income, lower wages and slow economic growth. The job market in the auto industry affects the workers of the car companies and the many spin-off jobs created along with affecting the consumers who buy the automobiles. While they still need to have enough employees to manufacture the demand that is A Nation On Wheels 5
needed, the auto companies have to hire workers. The need to save money remains, so what the automakers have done is hire younger less experienced workers at a lesser wage. This is an example of wage inequality. The veteran employees have been offered early retirement packages and buyout incentives as a way for the companies to make jobs available to rehire workers at a lesser wage. Ford, General Motors, and Chrysler have a new provision called a tier-two wage that allows them to pay half of the wages and benefits to new workers than they did for the longer time employees.
This includes production and non-production workers. For GM and Chrysler, they are working with the UAW on identifying which jobs should be classified production and which jobs should be classified as non-production. As these two companies will only use the tier-two wages for non-production workers, Ford will use the tier- two wages for both production and non-production workers. (Barkhohlz & Wilson 2008) General Motors will be closing four of its truck manufacturing plants by the year 2010.
This is in an effort to save a billion dollars in one year. However, how is closing plants going to save money if consumers are not buying vehicles? GMs’ focus is going to be on production of more cars and a heavy focus on producing more hybrid cars. The price of fuel has gone up so much that consumers are not purchasing the big trucks and SUV’s anymore. An effort to keep Americans buying American manufactured cars is the reason that GM will be looking into the production of more fuel-efficient hybrids.
Wage inequality primarily exists between skilled and unskilled workers and stems from sub contracting and outsourcing as a means for International Trade. Skill is not easily defined or measured. Manufacturing such as in the auto industry measures skill by using a ratio of non-production to protection personnel. Employers do have a need to keep workers in the skill set that they are either trained in or have a higher skill level developed. A Nation On Wheels 6 The auto industry wages have been primarily controlled by the United Auto Workers since 1936.
Globalization has in recent years made an effect on wages and the UAW and its push to have nonunion suppliers stay out of the Union. This could cause a higher cost from the suppliers forcing GM, Ford, and Chrysler to pay less in wages. Bernanke (2007) downplays the idea of Globalization that has increased inequality. He argues that skilled workers in technology have a larger affect. There are more skilled workers who have a higher education than less skilled workers who can keep up with the fast pace on technology. This continually boosts their incomes, unlike less experienced workers.
Technology updates, consumer savings, and work effort are factors in addition to monetary policy that determines the amount of output by the economy. Monetary policy can affect the short- term employment and output. This is due to the Federal Reserves’ ability to stimulate the economy while in a recession. The Federal Reserve does this by lowering interest rates. If they worked to get the inflation rate to zero or close to it, then short-term rates would be so low that it could in effect cause another problem by not allowing the Federal Reserve to have room to lower rates if
they needed to stimulate the economy. The Federal Reserve has to be more concerned with output and employment in the short run. These factors affect the employment rate of auto companies, their suppliers and parts and service companies. This type of short- term solution could be just what is needed in order to keep autoworkers employed. By the Federal Reserve getting the economy going again as a short term goal, consumers will start purchasing vehicles again and at least reach stabilization.
The automotive industry is clearly a primary factor that has an influence on economic changes. A direct challenge for policy makers of today comes from the changes that are happening in today’s world. Most consumers feel that it is difficult to determine what direction the future will bring but economists can look back at past history of the auto A Nation On Wheels 7 industry because of the substantial impact it has on the economy. As there are a number of industries that affect the economy, the auto industry is by far the largest contributor for Americans.