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Monday, February 27, 2006

Big Profits, at Whose Expense?

The New York Times reported in a story by Louis Uchitelle today on Caterpillar's new two-tier contract.  The pay package (wages plus benefits) used to be about $40 an hour, but now it is roughly $25 an hour ( about $18 in wages and $9 in benefits).  Veteran workers still receive the old wage and benefits package, but new workers receive a considerably lower package under the new contract that was finally ratified after years of failed job actions. 

Company executives claim that the cutback in living wages will "reposition" Caterpillar and allow it to increase employment in the Midwest because of a "viable" labor cost. Id.  According to Caterpillar managers, the company "cannot afford to be more generous simply because it is doing well right now."  Instead, group president Oberhelman claims that:

"There is a balance that must be struck between [Caterpillar's] being competitive  and [workers'] being middle class."

Caterpillar is not hurting for revenues or for profits.  Its revenues grew in 2004 to 33% more than they had been in 2003, and they grew in 2005 to 20% more than in 2004.  Its profits have increased correspondingly--up 40%, to $2.85 billion in 2005, nearly triple what they were in 2003.  Id.

The article notes that these gains are not translating to higher wages or more generous benefits.  Instead, the long-term UAW contract provides for only one raise, a meager 2 percent, in December of 2008.  Defined benefit plans are available only to veteran workers.  New workers have to acquire 12 years  on the job before they are immune from layoffs.  Health insurance co-payments are rising for current employees and for retirees.   Put simply, Caterpillar has managed to add a new wrinkle to the way U.S. employers are taking their profits out of the hides of their workers.   Wage and benefit cuts are no longer the province of companies that are failing and claim to need to cut costs to survive;  instead, Caterpillar has used them to squeeze more profits out of a hugely profitable business.  As Harley Shaiken (University of California at Berkeley) notes,

Caterpillar "is one of America's largest exporters, and it is very profitable.  If there ever was a company that could bring back the social contract of the mid-20th century, it is Caterpillar.  But it chooses not to."

Remember that the somewhat more balanced distribution of wealth in the second half of the twentieth century came about after several significant events from the 1930s through the 1970s-- enormous losses  during the Great Depression and New Deal programs like Social Security and the GI Bill that helped lift millions out of poverty and paved the way to a college education and better future for millions of military veterans permitted the middle class to see opportunity everywhere it looked around the country, as well as the enactment of  progressive income taxation (at fairly steep rates through much of the century) and estate taxes that were able to take significant chunks out of the inherited wealth passed to new generations.  See Kopczuk & Saez, Top Wealth Shares in the United States 1916-2000: Evidence from Estate Tax REturns (Ma. 15, 2004).  It's impossible to be sure where the current downgrading of jobs and benefits will lead, but it is clear that ordinary Americans will have less job security and more concern about their standard of living in retirement.   When these labor trends are coupled with other recent developments--increasing consumption tax features that fail to tax returns to capital, lower rates of taxation generally, the temporary (and maybe soon permanent) repeal of the estate tax, the push to change Social Security from a guarantee to a risk, outsourcing of manufacturing and servicing jobs abroad--one can only worry that the gap between the super-rich and people in the rest of the distribution brackets will continue to grow, possibly resulting in reconstitution of the "robber baron" classes that existed prior to the Great Depression. 

Posted by LindaMBeale on February 27, 2006 at 01:08 AM | Permalink

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Comments

It's worth noting that CAT is still in business and still provides thousands of relatively good jobs. Companies that didn't adjust to market pressures, like Delphi, are bankrupt. If I were a blue-collar worker with many years in the work force still to go, I know which I'd choose.

Posted by: Dennis Nolan | Mar 1, 2006 3:16:43 PM

Linda,

Excellent post. Many thanks for taking the time to write it.

The themes you touch on are very similar to those of Jeff Faux at the Economic Policy Institute, who appeared on C-Span over the weekend to discuss his new book, The Global Class War. Indeed, a historical review of tax policy suggests that the pendulum has indeed swung dramatically in favor of wealthy investors. As Faux noted in his talk, a large number of conservatives and establishment types (and he quoted a lot of them, including Paul Volcker and Warren Buffett) are voicing concern that growing trade deficits, domestic income inequality, and the shrinking social safety net, including the serial scuttling of traditional pensions, are increasing the likelihood of economic (and thus political) tumult in the U.S. With clear evidence that even science-driven R&D work is amenable to large scale outsourcing, see, e.g., Steve Lohr, Outsourcing Is Climbing Skills Ladder, NY Times, Feb. 16, 2006, at C1, we are one recession away for a bout of political fingerpointing of epic proportions.

Posted by: William Henderson | Feb 27, 2006 11:49:37 AM

Very good post, LindaMBeale.

It is sad indeed that concerns about the destruction of middle-class lifestyles for hard-working Americans can be dismissed snidely as "unrepententant socialist sentiment." Of course international competition is a reality, but there are various options, in terms of social and economic policy, trade policy, labor and employment law, etc., that could deal with this issue with different results.

Our current policies are creating a decline in real wages for American workers over the past several years, and an ever-increasing wage gap between the folks at the top, the folks at the bottom, and the ever-declining middle. And it's not just that some folks are getting paid less. The practically unique American system of providing vital benefits such as health care and pensions through private employers is increasingly in crisis.

These are real problems of middle America. Elites who ignore these problems or condescend to those who raise them with a "oh, it's all inevitable" waive of the hand, show depressing insensitivity and also do so at their political peril.

Posted by: Joseph Slater | Feb 27, 2006 10:55:11 AM

To speak for my fellow 1Ls:

For those of us who are about to go spend the entire summer working for free, $18/hour sounds pretty damn good.

I agree with the two previous posters. If we insist on paying high wages for outdated jobs, just because that job paid well in the past, we will be left in the dust.

Posted by: Bev | Feb 27, 2006 10:52:54 AM

The flipside of this, of course, would be: Big Wages, but at Whose Expense? The answer, naturally, is those who would be perfectly happy to work for those lower wages but didn't get there in time for the big charity wages. The enemy of high wages isn't the employer, it's your fellow citizen competing for the job. Blame that insufficiently selfish son of a bitch for being willing to work for that much.

Posted by: Dylan | Feb 27, 2006 9:15:29 AM

"***one can only worry that the gap between the super-rich and people in the rest of the distribution brackets will continue to grow, possibly resulting in reconstitution of the "robber baron" classes that existed prior to the Great Depression."

The use of the word "only," in this sentence, is interesting. Does it signal the author's belief that the "only" viable action, under the described circumstances indicated, is worry?

Seeing this unrepententant socialist sentiment, the mind boggles at the numerous questions raised herein. Are we to assume that the union is complicit in this march to "robber baron[dom]," or is it possible the union recognizes competitive pressures on the company which necessitates a change to the cost structure in the long term? Could there be some explanation for this action related to the competition of the market place; and the end result may not be higher profits but lower prices for the product? In what world is an annual annual wage and benefit package of $52,000 (assuming no overtime), indicative of the return to the great depression? Does this post indicate a greater need to teach basic economics in our primary schools, so that children can understand the need to identify skills that will be valued in a globalized economy where manufacturing jobs will no longer support a wage and benefit package which is more than $80,000 per year?

Posted by: stereg | Feb 27, 2006 7:45:40 AM

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