Wages don't figure in rebound
As profits soar, employees say good times haven't reached them
For
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
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
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.
