Commentary: Why Workers Still Hold A Weak Hand

The new labor pact Caterpillar Inc. and the United Auto Workers (UAW) reached on Feb. 13 is a case study of the conflicting trends in today's economy. On the one hand, Cat has posted record profits for four straight years. On the other, the recent labor deal calls for newly hired workers to be paid 70% of the $20 an hour that current workers earn. It also provides minimal raises for current union members (table).

The UAW had little choice but to go along with such onerous terms--similar to those won by Caterpillar rival Deere & Co. last October. The alternative was to see more jobs at both companies lost to outsourcing. Throughout the 1990s, both companies have cut costs by farming out work to suppliers and by expanding in lower wage, nonunion plants in the South and overseas.

SCROUNGING FOR SKILL. Indeed, the union's concessions underscore the degree to which employers still have the upper hand, despite jobless levels that are the lowest in a generation. Though most companies today are scrounging for skilled workers, many also continue to control costs by outsourcing, downsizing, and offshore production; stiff global competition all but rules out price hikes. So although average wages finally outpaced inflation by 2% last year, they still remain 3% below their mid-1980s peak--and even fall below 1973 levels, according to the Bureau of Labor Statistics. These trends hold true for union and nonunion workers alike. "Wages are rising, but they haven't taken off," says Nicholas S. Perna, chief economist at Fleet Financial Group. "Employers have learned how to manage their labor costs."

The UAW's stinging defeats at Cat and Deere show how little bargaining power the union has. It first struck Cat in late 1991, when the economy was barely out of recession and unemployment ran at nearly 7%. Cat refused to sign a contract modeled on the union's contract with Deere. Such pattern-bargaining, Cat argued, had been rendered obsolete by globalization. Its largest rival, the company said, was no longer Deere but Japan's Komatsu Ltd., where wages were below those at Cat and Deere.

Cat won the battle by threatening to replace strikers. In mid-1994, the union suffered an even bigger setback in a second walkout. This time, Cat made good on its threat by bringing in low-wage replacement workers from one of its Southern plants. Several thousand of the union's 12,000 members panicked and crossed the picket lines. The strike was officially ended in December, 1995.

In retrospect, Komatsu wasn't the threat it promised to be. In part, it was hurt by a strong yen and poor management. In addition, Cat Chief Executive Donald V. Fites did a masterful job of making his company globally competitive by cutting costs and initiating a sizable restructuring. Result: Cat's sales jumped 15% last year, to $18.9 billion, while profits soared by 22%, to $1.67 billion.

DEERE SEASON. Deere, too, has prospered and is getting an added boost from the same two-tier wage structure Cat is now adopting. Deere has racked up record profits for 18 of the past 19 quarters. It has added 220 UAW workers since the new pact was signed last fall, all at wages about half those of Deere's current 9,500 union members. And it faces little problem finding recruits, despite Iowa's low jobless rate of less than 3%. Last summer, the company got 9,000 applications for 200 slots, even though it warned applicants that the jobs were only temporary and would pay $10.40 an hour, nearly a third less than union wages.

Companies like Deere and Cat hold particularly strong hands in today's economy. Their unionized workers are highly paid by blue-collar standards, and legions of workers stuck in lower-rung jobs are eager to take their places. Plenty of nonunion companies, too, use downsizing and cost-cutting to hold wage hikes at bay. Across the economy, the upward pressure on wages that typically comes from low unemployment is being held in check by the cross-winds of the global economy.

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