New Midwestern Labor Wars

Earlier this year, the battleground in Midwestern labor wars involved public sector workers. This summer, the front line has shifted to private-sector manufacturing unions, especially in the cornerstone industries of steel and heavy equipment.

In Joliet, Illinois, most of the 780 union workers at a Caterpillar factory have been on strike for twelve weeks, to protest company demands for a six-year wage freeze for top-tier workers, plus sharply increased worker contributions to health care plans. At the same time, the Wall Street Journal reports that ArcelorMittal, the world's biggest steelmaker, is demanding that wages and benefits be cut for all workers by no less than $28 per hour, or 36 percent. U.S. Steel, the nation's biggest steelmaker, is heading into contract talks with the United Steelworkers Union (USW): U.S. Steel will be focusing on pension and health-care costs, but apparently is demanding fewer union concessions than is ArcelorMittal.

The two steel companies employ 26,000 workers nationwide, but more than half -- 15,000 -- work at two big mills in northern Indiana, the U.S. Steel Gary Works and the ArcelorMittal plant at Burns Harbor. ArcelorMittal is headquartered in Luxembourg and its Burns Harbor plant, originally owned by Bethlehem Steel, is the largest steelmaking complex in the western hemisphere.

The details -- pay scales, profit margins and significance -- differ widely between Peoria-based Caterpillar and the two steel companies. But the background noise is the same. All three companies, like their industries, have gone global. Midwestern workers compete with workers around the world. Unlike their companies, they can't pick up and move to some other country. The USW, like the International Association of Machinists Union in Joliet, says it will strike if necessary, but in the global economy where jobs are more mobile than unions, this strike threat often is an empty one.

The Caterpillar strike in Joliet is important because, as the New York Times pointed out, the company has been a leader in the past in bare-knuckle brawls with unions, winning union concessions such as two-tier wage structures that were later adopted by automakers. Caterpillar also is hugely profitable and, despite its demands for wage freezes for workers, has given big raises to executives.

The steel industry, by contrast, faces tough global competition and tight bottom lines: ArcelorMittal's profits were down in the first quarter to $11 million from $1.1 billion a year ago, while U.S. Steel lost $219 million in the quarter.

Another difference is in the pay scales. At Caterpillar, top-tier workers, who are about two-thirds of the work force, average $26 per hour. The average steelworker makes $77.40 per hour and ArcelorMittal said this pay, plus benefits including retirement benefits, means that each worker costs it $170,855 per year.

All this makes the Midwest the focus of American labor conflict, just as it was the past two years when governors in Wisconsin, Ohio and Indiana tried, with varying success, to trim the ability of unions, especially public-sector unions, to represent their members. Indiana turned itself into a right-to-work state. Wisconsin Gov. Scott Walker survived a recall election forced by angry public service unions, but lost control of the legislature, at least for now. In Ohio, voters overwhelmingly repealed a tough anti-collective bargaining bill pushed by Gov. John Kasich. 

These issues will come up again politically in this year's election, especially in Wisconsin and Ohio. The Caterpillar and steel mill battles, by contrast, are being fought on two stages, one intensely local, the other global.

Companies can play hardball and get away with it, because they have somewhere else to go. Last year, Caterpillar closed its locomotive plant in London, Ontario, after the union rejected a demand to cut wages by 55 percent. (The same threat hangs over the Joliet plant, which Caterpillar rents on a lease that, I'm told, expires next year.)

Caterpillar still has vast facilities in the United States and says it's expanded its American employment by 6,500 workers over the past year. But it increased non-U.S. employment by twice as much and has both more workers and more sales outside the U.S.: it has 16 facilities in China alone, and plans to add two more.

Steelmaking has been a global industry for years. America lost its leadership in the industry to import competition from countries like Japan and Brazil more than 30 years ago. The U.S. now has barely 6 percent of world steel output.

This global competition has an implication that is falling squarely on hourly workers who never saw it coming. This implication was stated in 1948 in a theory called "factor price equalization," proposed by the late Nobel Prize-winning economist Paul Samuelson. In plain language, this theory states that if the same thing can be made in two places in the same market, over time the price of that thing -- and the cost of making it -- will be equal.

Basically, this means that if the same ton of steel or bulldozer part can be made in one place by workers earning $30 per hour and in another by workers earning $10 per hour, in time all these workers will be making $20 per hour. This, obviously, is good news for the low-paid workers, but not so good for those making higher wages.

It's taken sixty years for Samuelson's chickens to come home to roost, mostly because China and the U.S., say, were never part of the same market. Now they are. Assuming they keep their jobs, workers in Gary and Joliet will never be paid as badly as Chinese workers are, because wages in China will rise. But in due time they, like other Midwestern factory workers, will be paid the same as Chinese workers.

(This already has happened in the competition between the Rust Belt and the Sun Belt. Average wages for production workers in Michigan are now about the same as those in Mississippi.)

Most people these days don't work on assembly lines or blast furnaces, so most people don't worry much about factory wages. They should. Lowered wages for factory workers push down wages for almost everybody else. That means most Americans have less to spend (as we're seeing now). In a country where consumption accounts for 65 percent of the economy, consumers need to have enough money to spend, or the economy collapses.

This declining purchasing power explains why the recession happened. The battles in Gary and Joliet explain why it isn't going to end any time soon.

Comments

[Aaron M. Renn]

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.

[Lincoln Kennedy]

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!

[Mike Woods from Carmel]

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.

[Chris Barnett]

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.)

[Aaron M. Renn]

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.

[Richard Longworth]

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?

[Aaron M. Renn]

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.