As profits soar, employees say good times haven’t reached them

Wages don’t figure in rebound

As profits soar, employees say good times haven’t
reached them

By Charles Stein, Globe Staff

For Caterpillar Inc., times could hardly be better.

Like much of corporate America, the Peoria, Ill., maker
of construction equipment is benefiting from a
surprisingly powerful economic rebound. Two weeks ago,
the company reported a 200 percent increase in first-
quarter profits and predicted profits for the rest of
the year would be strong, as well. Chairman Jim Owens
credited the global expansion and people across the
company who are ’’making a positive difference."

Not all those people are feeling as chipper as Owens.
Three days after the earnings announcement,
Caterpillar’s 8,000 union workers rejected a proposed
contract that offered one-time bonuses instead of
raises, required bigger worker contributions for health
insurance, and mandated significantly lower pay for new
hires.

’’The contract was a slap in the face," said Randy Ary,
a 30-year Caterpillar veteran who voted against the
pact. ’’The company is making good money. All we are
asking for is a share."

Other US workers may be asking for the same thing. A
full year into an economic expansion that continues to
pick up momentum, profits are growing rapidly, while
wages are rising barely at all. In the fourth quarter
of 2003, profits as a share of the total economy
reached their highest level in more than 50 years. The
share of the pie going to wages and salaries hit a 50-
year low.

’’What we are seeing is historically unprecedented,"
said Andrew Sum, an economics professor at Northeastern
University.

On the household level, the split also is lopsided.
Affluent families have received significant gains from
the rising value of their stocks and homes. On top of
that, the well-to-do were the major beneficiaries of
President Bush’s tax cuts.

’’Up to this point, most of the benefits of this
expansion have accrued to higher-net-worth households,"
said Mark Zandi, chief economist at Economy.com, a
Pennsylvania research firm.

Over time, Zandi said, the rewards from the better
economy should spread to the middle class, in the form
of more jobs and rising salaries. The jobs report for
April, to be released Friday, is expected to show
another boost in employment. But it could be another
year, analysts say, before the rising tide lifts most
of the boats.

And in an election year in which the economy will play
a critical role, such a delay could be important. While
Bush will be able to point to a growing economy, it
remains to be seen whether most Americans will feel it.

’’It’s a good economy, but the question is: for whom?"
said Richard DeKaser, chief economist at National City
Corp., a bank based in Cleveland.

Typically, business profits recover before the rest of
the economy. Companies need to be doing better before
they have the confidence to invest in new equipment or
hire new people. This time around, say analysts,
business has taken longer than usual to take the next
step. The bursting of the technology bubble in 2000,
and the subsequent collapse of profits, hit corporate
America hard.

Corporations reacted by hunkering down and cutting
costs. Caterpillar, for example, cut more than $1
billion in expenses between 2000 and 2003. ’’We’ve made
tremendous productivity gains in the last few years,"
Owens said recently.

Other companies did the same. Cost-cutting alone did
not create big profits, but it set the stage for them
by lowering the break-even points sharply. When the
economy finally did come back last year, profits
exploded.

In the most recent quarter, Caterpillar earned $1.16 a
share, far above the 70 cents Wall Street was
expecting. New-economy firms like Motorola Inc. and
old-economy companies like Ford Motor Co. also
performed far better than anticipated.

The rise in profits explains much of last year’s big
gains in the stock market. The Standard & Poor’s 500
index, a broad measure of the market, climbed 26
percent in 2003. Although many Americans have a stake
in the market, wealthier families control a
disproportionate share of market wealth. According to a
Federal Reserve survey of consumer finances, the top 10
percent of households, on average, own $250,000 worth
of stock. Families at the midpoint on the income scale
own $15,000 worth of stock.

The wealth generated by rising home prices is more
broadly distributed, since about 68 percent of American
households own their homes. Still, the top 50 percent
of families own roughly 90 percent of the nation’s
housing wealth, according to the Fed.

The impact of last year’s tax cut also is skewed toward
the top. All Americans saved money from the tax cut
approved by Congress in 2003, but for the top 10
percent of households the savings averaged $5,500; for
middle-income families the average savings was $300,
according to Citizens For Tax Justice, a Washington
advocacy group.

On the wage side, the problem is straight out of
Economics 101. Demand for workers has been weak, while
the supply of available workers has been large.

’’When you get right down to it, business has the upper
hand over labor in negotiations over pay," Zandi said.

Wages have been climbing at roughly a 2 percent pace,
about half the gains that workers saw in the late
1990s. Adjusted for inflation, pay has been essentially
flat.

The globalization of the economy and the move toward
outsourcing have constrained wages. So has the spike in
health care costs. With more of the compensation dollar
eaten up by medical costs, there is less money left for
wage increases, economists say.

In the short run, the surge in productivity at American
companies has allowed business to produce more without
adding people. But the job drought appears to be
ending. The economy added more than 300,000 jobs in
March, and the expectation is that job gains in the
coming months will be solid.

Eventually, a better labor market will translate into
better wage gains, say economists. But that could take
a long time.

’’We need a much tighter labor market than we have
now," said Allen Sinai, chief economist at Decision
Economics Inc. in New York.

The US jobless rate in March was 5.7 percent. Most
forecasters say the rate will need to drop closer to 5
percent before the balance of power starts to shift in
the workplace. Sinai predicts that will not happen
until sometime in 2005.

Randy Ary is not holding his breath. His union at
Caterpillar, the United Auto Workers, did not order a
strike when the recent contract was rejected, and the
two sides continue to talk. Even so, Ary is not
terribly optimistic that a future settlement will put
more money in his pocket, no matter how much money the
corporation makes.

’’There are not a lot of good jobs out there," he said.
’’We don’t look for much of an improvement."

Charles Stein can be reached at stein@globe.com.
Copyright 2004 The New York Times Company

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