The Wage SqueezeAaron Bernstein
Since the early 1980s, Briggs & Stratton Corp. has employed a host of tactics to fend off Japanese and other rivals. The company, which makes small engines for lawn mowers, wrung concessions from union workers, laid off white-collar ones, built a plant in Mexico, and sank millions into new automated equipment. The strategy worked. B&S turned a record profit in 1994 and is running 31% ahead this year. And the falling dollar has dampened any competitive threat.
Still, the flush times haven't stopped CEO Fredrick P. Stratton Jr. from making one of the most dramatic moves since his grandfather founded the Milwaukee company in 1909. Last year, he announced that B&S would shift 2,000 of its 5,500 jobs to Kentucky and Missouri. The reason: He can pay half the $21-an-hour his workers up North get in wages and benefits. Stratton says he has to worry about future profits. That's cold comfort to Gloria Zajackowski, 48, a 17-year veteran who was laid off in June. Fearing she may never earn so much again, the Zajackowskis have pared their spending. They won't buy their 17-year-old daughter a car and had two kids fix the garage door rather than shell out $525 for a new one. Zajackowski is bitter about Corporate America's cutbacks: "How far can this go before they ruin everything?"
Stratton's move exemplifies the hard-nosed cost-cutting philosophy that has spread through executive suites in the 1990s. Four years into a recovery, profits are at a 45-year high, unemployment remains relatively low, and the weak dollar has put foreign rivals on the defensive. Yet U.S. companies continue to drive down costs as if the economy still were in a tailspin. Many are tearing up pay systems and job structures, replacing them with new ones that slice wage rates, slash raises, and subcontract work to lower-paying suppliers.
The result seems to defy the law of supply and demand: While companies prosper, inflation-adjusted wages and benefits are climbing at less than half the pace of previous expansions (charts). Indeed, one Labor Dept. survey released on June 22 shows real employee compensation actually sliding in recent years.
EMPTY WALLETS. Of course, pay stagnated in the 1980s, too, largely because of slow productivity growth and stiff foreign competition. In that decade, however, most college-educated employees pulled ahead even though the other 80% of workers lost ground. And the share of national income going to labor changed little. Yet today, even the incomes of many white-collar employees are sliding. And labor's share has slumped to levels last seen 30 years ago--despite substantial productivity growth.
These trends have been dragging down the economy throughout the recovery. With inflation-adjusted incomes advancing at half the pace of prior upturns, the Zajackowskis of the world have cut back on everything from autos to airline tickets. Growth in consumer spending is chugging along at half the rate of the spend-happy 1980s. And since consumers comprise two-thirds of gross national product, per capita GDP growth is running way below its historical trend. "This is the weakest consumption cycle of the postwar period, which is largely a reflection of the wage slowdown," says Joseph G. Carson, chief economist at Dean Witter, Discover & Co.
Many experts argue that this is just what the doctor ordered. After years of consuming more than we produce, borrowing heavily to maintain our shopping habits, and ratcheting up a huge trade deficit, these critics see today's timid consumer as a welcome development. Afd if companies are using their newfound profits to fuel a capital spending boom rather than pay artificially high wages to a workforce that views itself as entitled, what better way to keep the U.S. competitive in a cutthroat global economy? Sure, companies have laid off millions in endless rounds of restructuring, and certainly many people have suffered the unhappy consequences of lower wages. But thanks to those stiff measures, productivity has climbed at a healthy 2% annual rate since 1991, and exports are booming. Corporate America is once again in fighting trim, able to compete with the best of the world's producers.
UNNERVING QUESTION. Economic theory would suggest that the payoff for all of this good behavior is just around the corner. Already, shareholders are enjoying a juicy stream of dividend payments and capital gains. Historically, efficiency improvements have led to real wage and income gains for the average employee. "In the long run, labor productivity will rise, and eventually, this will put upward pressure on wages," says former Federal Reserve Board Governor Wayne D.
But how long must we wait for productivity gains to boost living standards? At this point in previous business cycles, gains from increased efficiencies would already have started to wind their way through the economy. But after closely tracking each other for decades, wage gains now are lagging behind productivity growth.
The unnerving question that is starting to creep into the discussion: Are we simply in the midst of an especially long and wrenching transition, or have structural changes in the economy severed the link between productivity improvements and income growth?
Why would it be any different this time around? Of course, companies always try to restrain labor costs to maximize profits. But when unemployment falls, they're usually forced to raise wages to attract and retain employees. That's not happening this time, thanks to sweeping changes in the U.S. economy that may be permanently altering the landscape.
For one thing, because of the pressures of a global marketplace, even companies making sophisticated, high-end products find they are competing against--and have access to--pools of cheaper labor in other parts of the globe. Where only factory workers used to worry about being displaced by cheaper Mexican or Malaysian workers, foreign job competition now haunts everyone from engineers to software programmers.
Technological change is doing its part to hold down pay as well. Twenty years after computers began infiltrating the workplace, efficiency gains are finally starting to be realized, reducing the need for live human beings to perform millions of repetitive tasks. Also holding down wages is the decline of a robust, unionized workforce that used to prod tightfisted employers into sharing more of the spoils. At 15.5% of the workforce, vs. 26% in 1977, organized labor exerts little upward influence anymore on overall pay levels. To top it off, the defense sector--long a crucial underpinning of the economy--continues to undergo a massive downsizing.
For all of these reasons, U.S. companies now dominate the labor market to an unprecedented degree. Indeed, it's possible that the U.S. could be shifting from a consumer economy to a producer-oriented one, not unlike that of Japan. For 40 years, the Japanese have fueled their export juggernaut by keeping consumer prices high and funneling cheap capital to producers. In the U.S. version, employers' upper hand allows them to keep the prices of consumer goods growing at a faster rate than the wages of those who produce the goods.
Since 1983, the prices producers charge consumers have escalated by 4% a year, according to Brookings Institution economist Barry Bosworth. But the prices for inputs--two-thirds of which are labor--have risen by only 3.3% a year. And because many new pay systems delink wages from the consumer price index, consumer purchasing power may be dampened for years. "The terms of trade will still go heavily against labor in the next 5 to 10 years," predicts Bosworth.
Even if the shift proves to be less fundamental, there's no question that total compensation is faring poorly. One of the best measures, the BLS Employment Cost Index, shows wages and benefits for 90 million private-sector employees averaging $17.10 an hour in March of this year, 2.8% lower after inflation than in 1990 and 5.5% lower than when the index began in 1987. While other surveys indicate slight gains, all show employees trailing badly compared with previous recoveries. Overall pay and benefits on the standard BLS hourly wage survey have outpaced inflation by a mere 0.67% a year since the recession ended in early 1991 vs. an average of 1.6% a year in the prior four recoveries.
DOWNWARD SPIRAL? The risk for Corporate America in all this lies in the prospect of chronically weak demand. As early as 1993, executives such as Procter & Gamble Co. CEO Edwin L. Artzt, who retired on July 1, saw that anemic income growth meant tightfisted consumers even in a recovery. They decided that the value-oriented marketing and pricing strategies devised in the downturn had to be permanent. Others, such as some Detroit auto makers, worry that the average family can't afford their products anymore. The average price of a car has jumped more than 70% in the past decade, while incomes have climbed only 40%. One result is a booming market for used cars.
The danger is that a downward spiral may develop. Value-hungry shoppers are prompting individual companies to hold down prices by whacking labor costs. But most consumers are also wage-earners. When all companies slice pay, they undercut consumer buying power and further exacerbate price competition--just the opposite of the old Henry Ford strategy of paying workers well so they could buy his cars. In the '90s, companies are finding new ways to keep a lid on compensation costs. By 1993, 74% of large employers had begun to dismantle traditional pay systems that dole out annual merit raises to most employees, according to a survey of 300 large companies by the Association for Quality & Participation, a Cincinnati-based professional group. "The contract with employees in America is changing," says John F. Hillins, vice-president of compensation for Honeywell Inc., which is overhauling its pay systems. "The old reward system that says you get a raise because you've been here a year sends the wrong message. Today, it's performance and behavior that count."
Many companies are installing schemes that tie part of wages to corporate performance. But because profits aren't always the only yardstick, pay doesn't necessarily track earnings. What's more, companies often clip pay scales in the new plans.
Last year, for instance, Mobil Corp. decided to compare pay with compensation at a mix of large companies instead of the oil industry. The upshot: The top 50% of its 30,000 U.S. employees--everyone up to the highest 600 executives--is overpaid by 5% to 7%. The bottom half, mostly clerical and other support staff, is even more over market. Mobil plans to lay off most of this latter group and subcontract the work to lower-paying outside companies.
Mobil has a new pay system starting this month for those who remain. The company granted only a 2% average merit raise in 1994 and none this year. Instead, it will dole out one-time payments equal to 3.5% of pay. It also froze all salaries to let the market catch up, despite $1.7 billion in profits last year--among the oil industry's best results. "Our pay is treading water as the market moves north to meet us," says Mobil's vice-president of administration, Rex D. Adams.
Other companies are focusing on local markets. On Apr. 1, Pacific Telesis set up three pilot programs that will cover all 13,000 of its nonunion managers and salaried workers by 1996. The San Francisco company is using mostly local surveys to make new pay comparisons. Anyone under the newly defined market wage gets a raise, while anyone over will have their salary frozen, though they may get one-time bonuses. All new hires will come in at the new levels. The surveys aren't all done yet, but so far, the pay cuts are larger than the pay increases.
Employers also are holding down payroll costs by using part-timers and temporaries--more of whom are white-collar. Employment in the temporary-help industry has soared nearly 50% since 1990, to 2.25 million last year. And the professional end is growing rapidly, according to a study by Robert W. Baird & Co., a Milwaukee-based brokerage. For instance, Robert Half International Inc., a temporary-help supplier, has doubled the number of accountants it places since 1992, to 85,000 last year. They earn $35,000 to $40,000 a year, 10% to 20% less than full-timers and often get no health care or other benefits. And most don't work year-round.
Take Tabitha M. Silva. After losing her job as a bookkeeper in May, the 21-year-old resident of Stirling, Va., sent out 10 to 15 resumes a week for two months. Finding nothing, Silva went to Accountants on Call, a temporary-help agency. It landed her a job paying $9 an hour--18% less than her old one and about 25% below the full-timer she replaced. "There are absolutely no benefits, so if my 14-month-old daughter gets sick, I have to take off with no pay or let my husband miss work," says Silva.
DOWN AND OUT. Employers are squeezing contract workers as well. Because they're self-employed or work for subcontractors, these employees often have even less leverage than regular staffers. Just ask Robert Heath, a programmer with 17 years' experience who held two- to six-month contract jobs with IBM in Boca Raton, Fla., from 1988 through 1994.
Initially, Heath earned $43 an hour, plus time-and-a-half for overtime. In 1992, IBM subcontractors began dffering as little as $30 an hour. Heath often refused contracts, working only 18 months from 1992 to mid-1994. When Big Blue's contractors offered him $28 an hour, Heath gave up and moved to Houston. "IBM hired programmers from India on special visas who will work for less," says Heath. "My guess is that they're up to one half of the 500 or so contract programmers in the Boca facility." IBM says it doesn't tell its contractors how much to pay.
The pay of college-educated men such as Heath outpaced inflation in the 1980s. But it fell in the recent recession and remains 1% below its 1989 level today, according to an analysis of BLS data by the Economic Policy Institute (EPI), a Washington think tank. A host of professions that thrived in the 1980s are now treading water. According to a national survey by Robert Half, nearly 80% of the 142 job categories it surveys in accounting, information systems, and commercial banking received below-inflation raises last year.
New college graduates face similar prospects. Starting salaries have lagged behind inflation since 1991 for most of the 70 majors tracked by the National Association of Colleges & Employers, which surveys some 350 college job-placement centers each year. "Starting salaries aren't going up because we have a surplus of college grads coming into the market every year," says Patrick Scheetz, the head of a student career development institute at Michigan State University.
In recent years, you could count on working wives to kick up family buying power. But buyouts, layoffs, and lukewarm job growth has cut two-earner households from a peak of 45.8% of families in 1989 to 44.9% in 1993, the last year available, according to the Census Dept., after rising steadily in the 1980s. While that may not sound like much, if that higher rate had been maintained, an additional 1 million families would have two wage-earners today. And the share of families with no earners at all (which includes retirees) hit 21.8% that year, a full point higher than in the late 1980s.
The combination of subpar pay gains and fewer wage-earners has already bitten deeply into family pocketbooks. Per capita disposable personal income has crawled along at 1.5% a year over inflation in this recovery, half the average of prior ones, according to the Bureau of Economic Analysis (BEA). And with fewer dollars flowing in, families are more careful about piling on debt. Total household borrowing, including mortgages and installment credit, has grown at less than half the speed of the heady 1980s, according to Federal Reserve Board data compiled by Dean Witter.
The result is a country of cautious consumers. One of them is Nancy Mudd, who in late May lost her $40,000-a-year job as an American Airlines Inc. ticket agent at the Louisville airport. Her job ended after 11 years when American turned over the airport's operations to AMR Services, another unit of AMR Inc., the carrier's parent. American offered Mudd a job at the same pay in Columbus, Ohio, but she turned it down because her husband, an American mechanic, couldn't move. She also rejected the $16,000 a year AMR Services offered her to do her old job in Louisville. Mudd found work as a family counselor for a funeral home. But it pays only commissions, and she says she'll be lucky to earn $30,000 a year. "We've cut back since we heard about my job last fall," says Mudd. "We were going to replace my husband's 1978 Grand Prix, but we haven't. And we're cutting back on vacations."
"NOT AN ABERRATION." Consumers' newfound prudence is most evident in big-ticket items. Auto sales peaked at 15.1 million last year, vs. a peak of 16.1 million in 1986, despite a surge in the adult population of nearly 10%. Housing starts totaled 1.45 million last year--20% less than their 1986 high. And airline traffic, which more than doubled in the 1980s, has risen only 32% since 1989, according to Avitas Inc. Overall, inflation-adjusted consumption expenditures per person have climbed at only 1.6% a year since 1991, compared with an average of 2.86% a year in prior rebounds, according to the BEA. "This is not an aberration, it's a permanent trend," says Dean Witter's Carson, who believes global competition and technological change will keep the pressure on wages.
Soft demand is a prime factor behind the relative weakness of this recovery. Despite a 20% jump in corporate investment since 1991, per capita gross domestic product has edged up a mere 1.5% a year since the recession's end, less than half the average of previous upturns, according to the BEA.
While slow income growth and a tepid recovery pose troubling issues, most policy analysts agree it would be folly for the U.S. to give back the gains in economic efficiency that have been achieved through the past decade of corporate restructuring. And even in the face of Mexico's economic collapse and the trade dispute with Japan, few are questioning our commitment to an open economy and free trade.
But sooner or later, the promise of this economic strategy has to be fulfilled for the majority of Americans. The sight of bulging corporate coffers co-existing with a continuous stagnation in Americans' living standards could become politically untenable.
At the same time, it's unlikely that corporate executives, charged with keeping their companies razor-sharp in the face of relentless global competition, will soften their edge. As Mobil's Adams put it: "There's a very intense determination in executive suites across America not to give away hard-fought improvements. It may be a long time before this shakes through and wages rise."
If anything, things could get worse before they get better. "If the economy slumps, the pressure on wages will get even more intense," says former Fed Governor Angell, now the chief economist at Bear Stearns.
Longer term, of course, the argument is that as economies grow overseas, they will buy more U.S.-made goods, creating more jobs and demand here. Over a truly extended time frame, overseas wages will rise to meet ours. But we are currently in uncharted waters, and the plain truth is that no one knows how long it will take to get to this economic nirvana--assuming we eventually do--or at what level global wage equilibrium will settle. "The new standard in this country is how much value people are adding vs. what people elsewhere in the world can add," says Edward Lawler, a management professor at the University of Southern California.
In the meantime, the burden is likely to fall on the political system to educate and contain an increasingly distressed workforce. The elections last November highlighted an angry, frustrated population. So far, however, most of the debate has centered on Big Government and excessive taxes. Even left-leaning Democrats such as Labor Secretary Robert B. Reich have focused on attacking corporate welfare and tax breaks for the rich.
But as the '96 campaign heats up amidst a softening economy, the class-warfare rhetoric of a Jesse Jackson or the economic nationalism of a Pat Buchanan or Ross Perot may get a wider hearing. "The people who voted for change in 1992 and 1994 comprise a vast swing group of voters, disillusioned and angry, with no strong party allegiance," says Reich.
Experts of all political stripes have worried about the widening inequality between high- and low-skilled workers in recent years. And the gap continues to swell because blue-collar types are slipping faster than professionals. In the past few years, however, all but the most elite employees have landed in the same leaky boat. If they all come to stress their common fate more than their differences, it could spell trouble for corporations and politicians alike.