Business Costs & Regulation

A Push for New Labor Concessions -- Now?

U.S. steelmakers and Caterpillar want steep concessions from their unions. If they succeed, will other big manufacturing firms follow?

On the surface, this may seem like an odd time for manufacturing companies to go on the offensive. Profits are at record levels. Inflation is low. Wages have been stagnant for almost a decade. The global recovery is lackluster. Executive pay is up sharply. And unions have been relatively meek. Other big companies haven't signaled any new push.

But the companies see it differently. Their view: The weak global economy is threatening to squelch the profit boom. The President Obama's health care plan will boost insurance expenses. Pension costs are rising. And, in the case of the steel industry, global competition is intense. So, with the job market weak, they believe now is the time to make changes.

The steelmakers have told the United Steelworkers union that they want to slash wages and benefits by more than a third from 2011 levels, and to eliminate retiree medical insurance for new hires. Caterpillar wants the International Association of Machinists to accept a six-year freeze on wages and pensions. Some Cat workers are already on strike.

The talks between these two companies and their workers' unions are likely to be test cases, setting the stage for other big labor negotiations this year and next.

"These are the leading edge," says D. Quinn Mills, a Harvard Business School labor expert and private consultant. "What's going on here is being watched carefully by other companies, which are ready to pounce on it. If [Caterpillar and the steel manufacturers] are successful, [pressuring unions for concessions] will quickly become a trend."

Both confrontations continue wars that the two sides have been waging for decades, with the companies trying to bring their labor costs closer to those of their major worldwide competitors and the unions trying to hold on to or advance workers' wages and benefits. U.S. manufacturing began feeling competition from lower-wage foreign firms in the early 1970s and has been squabbling with unions ever since.

Caterpillar says openly that it wants to move its workers' pay and benefit levels closer to what it says are market levels. The company contends that its top-tier, most highly skilled workers are paid 35% above what the market would dictate without union contracts. As for steelworkers, they are among the highest paid in U.S. manufacturing industries.

Right now, the employers have most of the leverage. Their balance sheets are strong. They have plenty of unused capacity. They can take a prolonged strike without fear of a backlash by stockholders. And they can still shift some production abroad -- as Caterpillar did following a long strike in the mid-1990s.

By contrast, the unions aren't in a good position to sustain strikes. In today's weak job market, high-wage jobs are hard to get. It's easy for companies to hire replacement workers. (Indeed, Caterpillar has already done so.) And Washington isn't likely to intervene in contract negotiations.

Is there real evidence that Caterpillar is facing serious competitive threats? Richard Hurd, a professor of industrial relations at Cornell University, says no. Rather, he contends, the heavy-equipment manufacturer is trying to take advantage of current conditions to pare back its pay scales for the longer run.

"What Caterpillar is doing is copying the pattern that they see in public sector unions," where states are successfully forcing labor leaders to cap -- or even reduce -- the cost of wages, benefits and pensions, Hurd says. "They now have the ability to push [down] the wage rates that the unionized sector has," he says.

The lopsided advantage enjoyed by the companies presents a difficult challenge for union leaders. They'll have to walk a thin line -- meeting some of management's key demands in order to preserve remaining jobs and successfully selling any new wage-and-benefits package to their members.

Moreover, the negotiations come at a time when increasing numbers of workers whose unions negotiated generous pensions and old-age health benefits in the 1970s and 1980s are approaching retirement and will soon be eligible to claim them.

And deadlines are approaching. Although the Caterpillar negotiations could continue for months, steelworkers’ contracts with the large steelmakers expire at the end of August. Meanwhile, the record profits that U.S. companies have enjoyed over the past few years appear to be ebbing as the dollar's value rises and demand for industrial products wanes.

That makes for high-stakes negotiations for both the companies and the unions -- with possibly serious implications for the labor picture in the next several years. For the first time in recent memory, "you have the makings of strikes and work stoppages," Harvard's Quinn Mills says. "It's a real challenge for both sides."

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