Caterpillar, Unions, and the Falling Middle Class

Why is Caterpillar, a company that made a record profit of $4.9 billion last year, demanding that unionized workers in its Joliet, Illinois factory agree to a six-year wage and pension benefits freeze? Quite simply, because it can.

That underscores the enormous challenge facing those who are trying to figure out how, as Francis Fukuyama put it in last Friday’s Financial Times, to “stem the loss of rich-world middle class jobs and incomes through forms of redistribution that do not undermine economic growth or long-term fiscal health.” Caterpillar, General Electric, and others are among the big multinational companies that are currently expanding employment in the United States, which is a good thing. But the new jobs they are creating are usually modestly paid (often in the range of $12 to $15 an hour), and the companies are determined to keep a tight lid on future wages and benefits.

For much of the 20th century, redistribution in the United States happened largely through the private sector. Employees, many of them organized by labor unions though many not, were able to demand higher wages and benefits because corporations had few alternative sources of labor and were usually able to pass some of the higher costs on to their customers. Government played a role through the tax system, but the big redistribution programs – such as Social Security, Medicare, and Medicaid – largely benefited those not in the labor force.

Globalization changed that dynamic. First, the lowering of trade barriers created intense new competition for U.S. corporations. Those saddled with overly expensive labor contracts, such as the Big Three auto companies, found themselves unable to compete with overseas rivals. Secondly, an expanding global market for investment allowed U.S. companies to set up operations overseas and then export back to the United States or to other markets. The new trade competition forced American companies to cut costs; the new investment openness gave them an effective means for doing so.

The result was a huge shift in the balance of power that strengthened global corporations like Caterpillar and weakened the bargaining leverage of their employees. Since the 1970s, corporate after-tax profits as a share of GDP have risen, with several wide swings depending on economic cycles, from an average of about 5 per cent to more than 10 per cent in 2010, the highest since records began in 1929. Wage and salary income, in contrast, has fallen steadily from close to 55 per cent of GDP in the early 1970s to less than 45 per cent today.

It has been more or less impossible for even the most powerful and well-organized unions, like the International Association of Machinists currently on strike against Caterpillar in Joliet, to resist these trends. The companies have too many options – from bringing in temporary workers to simply shutting down and moving the work somewhere else. Often the threat of relocation is enough to persuade unions to accept concessions.

The effects of this reverberate through the broader economy. U.S. multinational companies have historically paid some of the highest wages in the country, 25 percent above the overall average. If wages at the biggest and best companies are fixed or falling, wages will be tamped down at smaller companies as well. And of course the general weakness of the economy and high unemployment are also suppressing wages, exacerbating trends that existed long before the 2008 financial crisis and its aftermath.

At the moment, it is hard to see how the dynamic will change in ways that are more favorable to employees. Mostly what we have seen is rhetoric, such as the feckless presidential campaign “debate” over outsourcing. Even serious and important initiatives like the Harvard Business School’s Competitiveness Project are relying primarily on moral suasion to persuade companies to be better corporate citizens and undertake initiatives to strengthen the U.S. workforce and the broader economy.

The medium-term answers all involved some combination of rising employee skills and productivity that make the United States a more attractive location for high-wage work. But as long as companies hold all the bargaining cards, most of those gains will go to shareholders and management rather than to higher wages and benefits. And the problem of how to create and sustain middle-class jobs will remain unsolved.