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As inflation edges up: labor to push for 'catch-up' pacts.

As inflation edges up:

Labor to push for `catch-up' pacts

There is nothing an economist likes to do better than to quote himself--that is, if he is right. In an article on the demise of cost-of-living clauses written more than two years ago, I pointed out: "The rise in corporate earnings and the improvement in manufacturing efficiency means that labor will soon start demanding a bigger share of the profit pie."

This demand is now upon us. The key question is: How should manufacturing executives react to the demands?

The coming months will be important for labor negotiations in machine shops and metal fabricating companies as businesses try to maintain profit margins and employees fight back from the low wage settlements they agreed to in 1986 and 1987.

Union contracts covering about 2 million workers in private industry and state and local governments will be negotiated in 1990. Negotiated wage increases in the next 12 months should end up within the 3.5 to 5.0 percent range, lagging slightly behind an annual 5.5 percent increase in the consumer price index (CPI). The major manufacturers that will have to sweat through this are in metal fabricating of all kinds, transportation equipment (autos, trucks, farm equipment), and primary metals (steels and aluminum).

If you read the papers about increased corporate earnings and the high level of manufacturing capacity in use, it is obvious why labor unions believe it is their turn to benefit. After settling for lump sum payments or, in some cases, no increases at all in the last round of negotiations, unions expect to recover some of the ground they lost on wage rates. The steelworkers union stand in the National Steel Co's negotiations cannot be dismissed as a minor labor-management dispute. Neither can the Boeing Co's six-week strike nor any number of other strikes, including those at Timken, Alcoa, Mosler, Bethlehem Steel's Sparrows Point facility, Textron Aerostructures, and AT&T.

The upward push in wages began in 1988 with average wage increases of 3.1 percent in the machine tool industry. That was a rise from 2.4 percent in 1987. That increase was the first since 1981. In the years in between, many employers used lump sum bonuses as a way of avoiding big boosts in labor costs because such payments added no cost to the permanent wage structure and were, therefore, excluded from the calculation of benefits.

Wage increases tend to limp behind movements in the CPI. For example, 10 years ago, when the 1979 CPI moved up by a hair-raising 13.3 percent, wage increases in machine tools averaged "only" 8.4 percent. Yet, two years later, when the rate of increase in the CPI for 1981 lowered to 8.6 percent, average wage increases climbed to 9.6 percent, still reflecting a reaction to the prior years' runaway inflation.

Happily, the CPI dropped dramatically to 3.8 percent in 1982; 3.2 to 3.5 percent in 1983 through 1985, and 0.7 percent in 1986. But it rose to 4.4 percent in 1987 and 1988. By contrast, wage increases in machine shops and metal fabricating moved down to 4.5 percent in 1983 and then continued to slow to 4 percent in 1984, 3.7 percent in 1985, 2.4 percent in 1986 and again in 1987. But 1988 showed a rise to 3.1 percent. So the rise in 1989 to 3.9 percent is beginning to tell us something--and for employers it's not pleasant.

A CPI increase of 5.5 percent in 1990 should result in wage increases during the next 12 months averaging between 3.5 and 5 percent, probably closer to the top end. That would represent a 15 percent jump over 1989 and translates into a major headache for many metals manufacturing companies.

Memories of the recessions during the 1980s remain as a strong incentive to resist upward wage pressures, especially in metals manufacturing where the need for capital investment is acute. Metal fabricators continue to face intense competition from foreign sources even though capital investments to boost productivity and cost-cutting moves have been made; witness the steel industry.

In addition, the pressure against any price increases continues to haunt manufacturers. Goodrich tire, for example, recently lost General Motors' automotive business because the rubber company needed price relief but GM would not grant it.

Minimum wage pressure

The new federal minimum wage presents additional concern because of its ripple effect. You cannot raise the bottom wage rate without boosting the entire structure in order to maintain relative wage spreads. That effect, which often forces employers to increase wages with no offsetting productivity gains, could result in higher prices, thus hampering industry's effort to combat imports.

As inflation inches up, another effect companies are experiencing is an effort by unions to re-establish cost-of-living adjustment (COLA) clauses. Employees covered by COLA clauses made gains in the last two years as the CPI increased. Recognizing the likelihood of similar gains in 1990--with the CPI forecast to increase about 5.5 percent--some unions are trying to recover COLAs given up in previous negotiations.

Wages are not the employer's only worry as he looks at his total compensation costs. Negotiating benefit packages, especially health care, could prove difficult. Last year, total compensation for all employees in various machine tool and metal fabricating companies increased 16.3 percent faster than pay. This was due in large part to ever-increasing health care costs and the increase in social security taxes.

Despite containment efforts in recent years, health insurance premiums for 1990 are estimated to be as much as 20 percent higher than last year. Several years ago, joining forces with their unions, many companies were able to reduce premiums and still maintain benefit levels through cost containment measures such as second opinions and utilization of outpatient services. This worked for a while, but that well seems to have run dry.

As the cost and distribution of medical services catch up with containment tactics, employers must explore new methods to control costs. As such savings become more elusive, perhaps non-existent, the debate at the bargaining table is sure to become more heated. Adding further fuel to the fire are job security issues such as contracting out, use of temporary employees, and relocating businesses, all of which promise to become red hot in 1990 along with the debate over pension plans, retirement health benefits, and child care services.

How to respond?

How can management respond to these upward pressures in compensation costs and wages? To achieve rank-and-file acceptance of a company's hold-the-line position will take more than a plea at the bargaining table that increased costs will undermine competitiveness and, in turn, job security.

In such situations, logic has little to do with the outcome. When Eastern Airlines pleaded inability to boost wages and benefits, even opening its books to the union, it pooh-poohed the data. Even when the union's auditor confirmed the company's financial statement, the union leaders charged that the company kept two sets of books.

Employers who would like to have the rank-and-file understand and accept the relationship between higher costs and competitiveness, will have to launch a carefully designed educational campaign (not a propagandistic onslaught). It'll have to make clear to, and convince, the rank-and-file that lower costs will improve sales which, in turn, will improve job security.

For the workforce to accept that plea, management credibility would have to be very high. Unfortunately, in that area many managements are deficient.

The campaign to persuade the plant labor force that cost containment is as much in the interest of the rank-and-file as it is in the company's interest must be carried on consistently, long before the two parties sit down to negotiations. If done at the last minute, or done amateurishly, it will be dismissed as "brainwashing". Nor can an executive expect to do it with his left hand in a spare hour or two as he takes care of business as usual.

Unless manufacturing companies take an active interest in such educational efforts, we may see an unpleasant upswing in compensation costs and in strike statistics.

Matthew Goodfellow, Ph D Executive Director University Research Center Chicago, IL
COPYRIGHT 1990 Nelson Publishing
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Goodfellow, Matthew
Publication:Tooling & Production
Date:Mar 1, 1990
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