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CAT Tracks for February 26, 2006 AN ALTERNATIVE CAT UNIVERSE

Economics 101 from the dog-eat-dog world of CAT(erpillar) in today's New York Times...

Two Tiers, Slipping Into One

By LOUIS UCHITELLE
PEORIA, Ill.

RICK DOTY is a 30-year veteran of Caterpillar, the big tractor and earth-moving equipment manufacturer. He is paid $23.51 an hour as a machinist, and he receives additional benefits worth almost as much. That sets him far above newly hired workers consigned to a much lower wage scale.

To these fellow workers, Mr. Doty, who is also a local union leader, struggles to justify an inequality that he helped to negotiate.

"I remind them they are making more now than they were before they came to Cat," said Mr. Doty, who spends part of his day at the one-story union hall of United Automobile Workers Local 974 arguing that $12 to $13 an hour is good pay here. "And I assure them that five years down the road, when the present contract expires, we in the union are going to improve their lot in life."

That does not seem likely. After more than a decade of failed strikes and job actions — mainly in Illinois, where Caterpillar has its biggest factories — the U.A.W. reluctantly accepted a two-tier contract that provides for significantly lower wages and benefits for newly hired employees. The new second tier is as much as $20 an hour below the cost of employing Mr. Doty, 50, and a dwindling band of other veterans.

As older workers depart, at Caterpillar and at other companies, the longstanding wage advantage that manufacturing workers enjoy over their counterparts in services or construction is shrinking fast. The trade-off is the promise of a manufacturing revival at long last in the old Rust Belt, as new hires come aboard at much lower labor costs.

"What we've done is reposition ourselves to actually grow employment in our Midwestern plants," said Jim Owens, Caterpillar's chief executive. "We finally have a labor cost that is viable."

Caterpillar is adding a significant chapter to the labor cost-cutting that is widespread in America, particularly at old-line manufacturing companies. Until recently, cutbacks in the wages and benefits of hourly workers were limited mostly to money-losing companies: failing steel mills, for example, and struggling airlines. They have said that their survival was at stake.

Now, however, even healthy and highly profitable companies like Caterpillar are engaging in the practice, and as they do so, the longstanding presumption that factory workers at successful companies can achieve a secure, relatively prosperous middle-class life for themselves and their families is evaporating.

"Caterpillar is a powerful symbol of this process," said Harley Shaiken, a labor economist at the University of California, Berkeley. "It dominates its field. It is one of America's largest exporters, and it is very profitable. If there ever was a company that could bring back the social contract of the mid-20th century, it is Caterpillar. But it chooses not to."

As Caterpillar's managers see it, they have no choice. "There is a balance that must be struck between being competitive and being middle class," said Douglas R. Oberhelman, a group president. Although Caterpillar's factories are among the most productive in the world, the managers argue that the company cannot afford to be more generous simply because it is doing well right now.

"You could say that in good times you could afford a different kind of package and in bad times you couldn't," said Christopher E. Glynn, the director of corporate labor relations. "The real question is: What's competitive? And our target is competitiveness."

The new contract reflects the company's success in imposing a "market competitive" pay scale; that is, wages and benefits that attract enough qualified workers by being slightly better than the packages offered by others in each community or region where Caterpillar has operations.

In the Midwest market, the competitive wage-and-benefit package is about $23 an hour, on average, Mr. Glynn says. Caterpillar's package for new hires in the U.A.W. contract ratified 13 months ago is pegged above that, at $28 an hour, which includes about $9 an hour in benefits.

Only the most skilled workers in the new lower tier — electricians and machinists, for example — make more than $20 an hour, or $41,000 a year, while in the gradually expiring upper tier, everyone does, even unskilled laborers and shop helpers.

In the new lower tier, such easily replaceable workers will no longer earn more than $12.50 an hour, or $26,000 a year. They must work their way up toward middle-class jobs, Mr. Owens argues, shedding the "union mind-set" of annual raises for doing the same minimally skilled task year after year.

"I want people to have a higher income," Mr. Owens said. "But you do that by starting out maybe driving a forklift or working in a warehouse and then you get new skills. You can learn how to paint. You can learn how to assemble. You can become a welder." Beyond that, he says, talented workers are encouraged to take courses to qualify for promotion to salaried jobs, like supervisor, outside the union.

Going back decades, the hourly wage in manufacturing has been higher, on average, than in nonmanufacturing jobs. Through most of the 1990's, that premium was 10 percent or more, but by last year, it had fallen to just 7.45 percent above the average in other industries, according to an analysis of Bureau of Labor Statistics data by the Economic Policy Institute, a research group based in Washington.

"We are converging in the Midwest on a $13- to $18-an-hour wage package and $9 more for benefits," said Daniel Luria, an economist at the Michigan Manufacturing Technology Center in Ann Arbor. "That is roughly $25 an hour, and it is down from about $40."

The trade-off for lower wages, Caterpillar's top executives counter, is more jobs for the region. Three-quarters of the 4,200 hourly workers that Caterpillar added in the United States last year, after the new labor contract was ratified in January, joined factories in Illinois instead of the network of small, low-wage plants that the company has opened in recent years in the South.

This southern network, as well as plants in Mexico, feeds parts and components to the big Illinois factories, where most of Caterpillar's tractors and earth movers, backhoes and excavators, giant off-highway trucks and other heavy equipment are assembled for sale in the United States and, to some degree, for export.

The domestic plants form the hub of what Mr. Owens calls a "globally cost-competitive" system that includes factories elsewhere in the world to serve different markets. A plant in Japan, for example, is producing earth movers for China's expanding mining industry; the next step, Mr. Owens says, is to put a factory in China.

But the company itself, he says, cannot succeed without the concessionary U.A.W. contract, combined with the network of lower-wage "focus plants" in the Sun Belt and in Mexico.

"It's a beautiful North American equation," Mr. Owens said.

Shane Hillard says he does not think it is so beautiful. He is one of the new Illinois hires, having taken a second-tier job at the big tractor factory here, closing down a small landscaping company to join Caterpillar. In doing so, he lowered his health care costs — he is a diabetic, and Caterpillar's health insurance was less expensive than his own — and he is no longer idle in winter.

"When you get down to it, I earned a little more in landscaping than I am earning now, even after expenses," he said. "But I enjoy structure, and I enjoy my job. I need something to do every day."

By the end of last year, Mr. Hillard, 28, had moved up from welder to machinist — and to a wage of $18 an hour, $2 above what the original contract called for. Caterpillar increased the pay scale for those jobs last October, to make sure that it could continue to attract the workers it wanted in the face of higher-wage offers for people with skills in those categories.

Those offers were coming to welders and machinists at a Caterpillar plant in Aurora, Ill., a suburb of Chicago where earth graders for highway construction are made. "We were having difficulty hiring some of the people we wanted," Mr. Owens said. "And our attrition rate was higher than we wanted, so we adjusted the wage to get the people we wanted and retain them."

Mr. Hillard, 160 miles away in Peoria, benefited. But even the $18 an hour is not enough, he says, to support the four people in his household. He lives with his fianc้e, who is going to college and not working, and two children — one each from their previous marriages.

"We don't ever have any extra money to do things," Mr. Hillard said. "I'd like to do normal things that I remember doing as a kid. The family going on vacation, that kind of thing."

What he would like, he said, is the $23 an hour or so that Mr. Doty and others earn as machinists, doing essentially the same work that Mr. Hillard does.

"I am not upset that they are making more," he said. "I believe they are being paid what they are worth. They are being paid what they need to live the way people ought to live."

His anger — directed at Caterpillar for not sharing more of its soaring profits — has made him an active member of U.A.W. Local 974. If the bottom tier does not rise substantially in the next contract, he says, he will vote against ratification. His superiors in the union are more circumspect, including Mr. Doty, who counts on a rising membership to strengthen the U.A.W.'s bargaining position.

The Illinois hiring over the past year has swollen the U.A.W.'s ranks to 11,500 of Caterpillar's 41,000 employees in the United States. Local 974 now has 6,000 members, up from 4,500 in 2004, and Mr. Doty, an executive vice president of the local who also works nearby at Caterpillar's diesel engine factory in Mossville, Ill., argues that the greater "union density" will give the U.A.W. more negotiating leverage when its contract expires in 2011.

"We have to get down the road to where we can bargain a better agreement," he said, "and six years will pass before you know it."

Caterpillar, meanwhile, is prospering. It reported revenue of $36.34 billion last year, up 20 percent from 2004. That was on top of a 33 percent increase in 2004 from 2003. Net income was up 40 percent last year, to $2.85 billion; it has nearly tripled since 2003. Tens of millions of dollars have gone into research to develop a great variety of Caterpillar products that sell against those of Komatsu and Volvo, the two biggest foreign competitors.

In the past, such gains would have also translated into higher wages and more generous benefits as contracts were renegotiated every two or three years. But the current, long-term U.A.W. contract at Caterpillar calls for just one general raise: 2 percent in December 2008.

Otherwise, there are some fixed bonuses and modest specified increases every six months as new hires work their way up the wage scale, which starts at $12 to $13 an hour for most factory workers and rarely gets to $20.

Fixed monthly pensions go now only to veteran workers, like Mr. Doty, and job security is effectively canceled for new hires, who must work 12 years without interruption to become immune to layoffs. Mr. Glynn notes that the arrangement gives Caterpillar leeway to shed the new workers when demand turns down for the company's products.

Employee co-payments for health insurance also rose in the current contract, for retirees as well as for active workers, although not by as much as the company had initially wanted, particularly for the retirees. The union membership voted twice against ratification and then approved the contract, with 59 percent voting in favor, after the company sweetened its health care package for retirees.

Having essentially won against the U.A.W., Caterpillar's managers are trying to persuade hourly workers to think of the current contract as having only one tier, the lower one, while those in the upper tier should be thought of as older workers whose wages were "grandfathered" until they depart. Ultimately, they hope to shift their new workers' basic loyalty from the union to the company.

"It's a good term, 'grandfathered,' because those folks were preserved at a wage-and-benefits level that was essentially twice the market," Mr. Glynn said. Already, 50 percent of the upper-tier workers who were around in 2004 have left, through retirement and attrition.

New hires are encouraged to view assembly-line work as short term. The way up from the admittedly meager wage scale is not a better union contract, the message goes, but a promotion — if not within Caterpillar, then at another employer. Driving a forklift or working on an assembly line for 20 years should not be a career goal.

"We talk these things out in round-table discussions with workers on every shift," said Paul Strang, operations manager for the tractor division in Peoria, where Caterpillar started in 1925, making tractors with tracks instead of wheels.

"People say: 'My dad hired in at $25 an hour, and I'm at $12 an hour. Help me understand that.' And we just talk through that," Mr. Strang said, adding that "we are competitive; this is a place where people want to work, and there are opportunities for promotion."

That goal is very much on display at the diesel engine plant in Mossville, which employs 2,400 people, about 25 percent of whom have been on the job less than a year. To make employees feel better, D. Dean Messinger, a plant manager, said, the bathrooms have been modernized and the cafeteria redecorated in a cedar shingle design. More to the point, a learning center recently opened on the factory floor, equipped with 30 computers and staffed with teachers from a nearby community college.

Training in r้sum้-writing and job interviewing are staples of the eight-week curriculum. For those who want to go on to college, Caterpillar offers to pay up to 90 percent of their tuition costs, as it has done in the past, and career counselors help steer hourly workers toward salaried office jobs.

"Whether people get a promotion or not, they have the opportunity, and that is what matters," Mr. Messinger said. "The ones who are most aggressive, they go back to school and they can rise."