August 22, 2002

In a recent labor-management conference in Tennessee, I reminded my audience that there is a third party to each negotiation.  Although no one is present to directly argue for that party, any negotiations that exclude the customer ultimately will lead to problems. 

Perhaps the baseball players finally decided that with falling TV viewership, weak consumer earning power, and growing concern about abuses from some of the wealthy (could this include baseball players and owners), they should tread softly before threatening to terminate another season without a world series. 

Certainly, some of those "rich" contract increases for airline pilots cannot compensate for the concessions and job losses that will surely follow increasing bankruptcies in the airline industry.  And many industrial unions are wondering what is the value of a strong contract if it leads to a weak industry that can only survive by shifting production abroad. 

None of this is to say that management is without fault.  In the past ten years, management has increased the share of compensation going to them.  At the same time, management also increased the percentage of ownership that they extracted from shareholders.  And some managers forgot about employees, customers, and shareholders in their rush to use company assets for their own purposes. 

Of course, the greatest problem for labor is the 1.4 million jobs that have been lost in the past 15 months.  Manufacturing alone, where union activity is more intense than other sectors aside from government, lost a million jobs.  Not surprisingly, job security is the greatest concern facing labor at this time. 

Hourly wages have grown much more slowly as unemployment has increased.  Three years ago, the hourly wage reached a cyclical peak of 4.3 percent above previous year levels.  Today, hourly wages are growing a more modest 3.2 percent per year. 

However, those who retained their jobs actually are doing better than those percentages suggest.  In the past six months, even adding July's poor performance, the paid workweek has expanded by more than a percentage point.  At the same time, inflation has moderated by almost two percentage points. 

As a result, earnings after adjustment for inflation has actually increased more rapidly in the past 12 months through June for the average worker than for any twelve month period in the previous expansion. 

When  $130 billion in reduced tax liabilities for any given earnings is added to that lowered inflation, the average wage earner has been able to increase savings by about 3 percentage points even as consumption continued to grow by nearly 3 percent per year. 

However, problems clearly are developing.  When those wage gains were 4.3 percent, other labor benefits, such as pension contributions and medical insurance, were costing employers about 3 percent more than the previous year.  Today, poor performance from investment advisors and an explosion in insurance premiums have pushed benefit costs to well over 5 percent more than a year ago. 

At the same time, operating profits have suffered some of the most rapid declines recorded during a mild recession.  In short, the ability of management to pay for those benefits, continue to provide satisfactory wage gains relative to inflation, and remain competitive with international producers  has seriously eroded. 

Indeed, labor probably will be trying to avoid "take aways" in their next negotiations.

Eventually, all employees will pay something for each medical transaction.  When medical benefits are provided free to employees, more services are sought than when a portion of the medical bill is paid by the workers. 

Employers also will increasingly try to rid themselves of defined benefit pension plans, where retirees receive a portion of their qualified salary regardless of the investment performance of the retirement fund.  This was an easy "take away" when the stock market was booming.  Shrinking 401k balances will make further conversions from guaranteed benefits to these contribution programs a much more difficult task.

I am hoping that senior management will not increase its share of compensation and its share of ownership at the expense of employees and shareholders in the future, as many did in the recent past.  However, I do not yet see the change in compensation methods that will cause that to happen. 

I do believe that hourly wages will continue to grow at just over 3 percent annually for the next year.  Other compensation costs will continue to balloon, possibly to increases of more than 6 percent as insurance costs continue to explode. 

Except where labor and management are completely out of touch with their customers, I see relative quiet on the labor front in the next year.  Indeed, some labor leaders are actually hoping to negotiate much longer contract periods than in the past. 

Yet, there are problems in competitiveness, retreats on benefits, falling profits, and lowered stock values that will make this an uneasy quiet for labor-management relationships in general.  Can we hope for as much from baseball?


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