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Wednesday, July 25, 2012

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Caterpillar saw the writing on the wall in advance and fought bruising wars with labor many years ago before their back was against the wall. This is a big reason they remained competitive in a global market while other heavily unionized industries like autos and steel went bankrupt.

Similarly, oft vilified Jack Welch got GE into fighting trim in the 80s. Unsurprisingly, GE remained a powerful company, and manufactures tons of stuff in the US even if it does operate as a globalized business.

For whatever reason, the management in autos and steel decided to kick the can down the road, and both they and their workers have paid a serious price.

So Aaron, how come factor price-equalization hasn't affected doctors salaries? Or the salaries of the executives running Caterpillar; if the board is elected by the shareholders to maximize shareholder value; and getting marginally less skilled laborers to make a marginally less quality product for substantial wage savings, why not get a marginally less skilled set of executives to run the company? Why not move the headquarters to China?

Because the unions that represent the doctors and lawyers work dilligently to force foreign student to repeat their residencies, or maintain absurdly favorable tax rates for top tier executives. Not sure how you can have thriving and democratic cities in a society like this. Maybe Chicago can still be the next Detroit! Every city a Sao Paulo!

I can see how Unions were absolutely necessary and instrumental to worker rights in the early industrial revolution. Nowadays, however, I think they have out-lived their usefulness in many ways. More than anything, I think, they create an artificial scarcity of labor.

Cat moved the London, Ontario locomotive work to Progress Rail (a Cat subsidiary) in Muncie, Indiana. Locomotives are a little bulky to import and export by ship, so Asian outsourcing remains unlikely.

Note that Arcelor-Mittal in Burns Harbor was a Bethlehem Steel plant prior to its bankruptcy. (It was bought out of bankruptcy by Wilbur Ross' International Steel Group, then sold to Mittal Steel.)

Lincoln, I'm not sure what doctors have to do with Caterpillar. However, you should read Enrico Moretti's New Geography of Jobs for more on tradeable vs. non-tradeable jobs. However, in fact, doctor jobs like radiologists that can be performed offshore are starting to be. Also, Americans are starting to travel overseas to obtain medical care offshore.

As for the executives and moving the headquarters, maybe that might even be a good idea to investigate, but to relocate the entire executive staff would require major turnover in the ranks. This would be highly disruptive. I think you'll find that top executives in a place like China are very well paid. And Peoria isn't actually a high cost location. Also, the existing staff no doubt has strong influence over something like that in the way that blue collar workers don't (principal-agent problems) though I'd be shocked if Cat hasn't offshored huge numbers of white collar workers like IT too.

The bottom line is that the moves Cat took (and GE) probably means that their workers suffered far less than they otherwise would have done when the firms became uncompetitive.

Aaron, your point (that the tough lines taken by Cat and GE have saved jobs and caused their employees less pain than those at less hard-line companies) is probably correct, but distressing nonetheless.

You're arguing (as is Cat) that these workers should be grateful to have a job, even as their pay is frozen or cut and their standard of living declines. This says more about the state of the economy in the globalization era than it does about any company. It says the best we can hope for, at least in tradable jobs, is declining working and living standards: any company that tries to buck this trend by protecting its workers is doomed to competitive disaster. It would be nice if workers in the non-tradable area (retail, for instance) were enjoying rising pay and work conditions, to take up the slack, but this isn't happening. One result of all this, of course, is lower tax receipts, meaning less spending on education, infrastructure, etc. All this adds up to the American decline about which so much has been written.

The problem, then, is not with Cat or any particular company but with a changed economy in which any company is damned if it does and doomed it if doesn't.

Any suggestions?

Great question. I wish I had a compelling answer. I don't think anybody does. It's unclear whether the global economy will ever support people making a high quality living with limited education and skills doing routinized labor. However, where skills are involved - such as skilled trades - there's still very good wages available. Not everyone can be an electrician, welder, or ironworker however.

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