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Caterpillar Inc. Sees Surging Profits, Amid Pay Cuts And Rumors Of Plant Closures

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Workers locked out of Caterpillar's London, Ontario plant.
Workers locked out of Caterpillar's London, Ontario plant.

Corporate profits are higher than ever, but for many workers, things just keep getting worse.

Take the situation unfolding at Caterpillar Inc.'s London, Ontario plant. The company, the world's largest heavy machinery manufacturer, is insisting that Canadian workers take a 50 percent pay cut, give up their current pension plan and swallow a significant reduction in benefits. On Jan. 1, Caterpillar locked out the plant's 465 workers, refusing to let them do their jobs until they make these sacrifices.

The moves are familiar to anyone who's watched the auto industry struggle with its workers and union over the past several decades. But Caterpillar, unlike the automakers, hasn't suffered much economically. Indeed the company has long stood out for its profitability, in the last five years hovering above the top 13th percentile on the Fortune 500 list. In the last three months of 2011, as Caterpillar was pressing Canadian workers to give in to its requests, the company reported a 44 percent surge in profits from the previous year. Now, if workers continue to resist, Caterpillar appears to be threatening to take their jobs out of the country. Not to China or Mexico, but just over the border to Muncie, Ind., where desperate Americans are eager to take any job -- no matter how low the pay.

"In the small picture, Caterpillar is a really hard employer, but the big picture here is obviously the race to the bottom," said Linda Kaboolian, a lecturer in Public Policy at Harvard, who studies workplace issues and has closely tracked the company's practices through the decades.

"The interesting political question in this country is whether or not there's any wage floor which is too low," she said.

The situation at Caterpillar illustrates an emerging problem with the nascent economic recovery: While corporations are rebounding from the depths of the recession, working Americans aren't. Corporate profits are at their highest level in decades while worker compensation is at a relative 50-year low. Much hope has been placed in the rebound of North American manufacturing, but while the industry has added some 334,000 positions in the past two years, many of the new jobs don't pay the old middle class wages.

The driving force behind these record profit gains are reductions in wages and benefits, according to a report by Michael Cembalest, Chief Investment Officer at JPMorgan, published last summer.

This is a major issue, experts say, and not just for those workers facing a lower paycheck.

"It's a fundamental problem: Now we have a situation where there's not enough purchasing power in the American economy to feed this recovery," said Thomas Kochan, a management expert at the Massachusetts Institute of Technology.

"It's not all bad," he continued, pointing to companies like General Electric, which have slashed wages while profits were strong in return for continued investment in the United States and the promise of more jobs. Other companies must cut wages to stay alive, such as the auto makers, which pay new workers nearly half what starting employees made before the crash.

"But if it's just companies slashing wages because they've got the power to do so, then it's dysfunctional," Kochan said.

While Caterpillar and the Canadian Auto Workers Union are currently at a standoff, observers believe there is little doubt that Caterpillar will win -- and equally little doubt that the company needs to slash wages for what Kochan would describe as functional reasons.

The company has deep pockets and a history of not backing down when it comes to labor disputes. It also holds a powerful trump card: since purchasing Electro Motive Diesel -- the company that owned the London assembly plant, one of the few facilities in North America that assembles locomotive engines -- in 2010, Caterpillar's rail operations holding company, Progress Rail, has opened a second assembly plant in Muncie, Ind. There, the non-union employees reportedly earn less than half of their Canadian counterparts -- $24,000 per year, wages that hover around the poverty line.

If the CAW doesn't fold, the company stands to lose little from closing its doors in London and moving those jobs to Muncie -- and many observers wonder if that wasn't the company's plan all along.

"My prediction is that the Canadians are going to lose this and it's because Caterpillar is the kind of company that will pay any price once it starts on this road, not because it's evil but because that's what its strategy is," said Kaboolian.

The CAW says it considers Caterpillar's demands to be aggressive enough to block actual negotiation. "We don't understand what Caterpillar's strategy is -- all we wish is that Caterpillar had never set foot here," said Jim Stanford, an economist at the CAW.

Caterpillar has stayed silent throughout the dispute, directing all media inquiries to a web page which says that the cost of wages and benefits for a unionized EMD supply plant in Illinois -- work that requires less training and traditionally pays less -- is about half that of the London plant, and that the Canadian facility "has antiquated work rules that make the London operation inefficient.”

Some take issue with that explanation, arguing that the changes demanded do not appear to be necessary for the company's survival.

"The larger story is that an extraordinarily profitable company like Caterpillar has determined that a fair standard of living for a semi-skilled manufacturing employee is $24,000 a year," Kaboolian said. "Let's face it -- every time workers lose a fight like this, American business gets a clear message that you can ratchet down the wages a little further."

RACE TO THE BOTTOM

The workers at the factory are mystified as to why Caterpillar would buy a company with a high-wage plant in Canada, only to lock out the workers less than two years later and suggest that the factory will eventually be shut down. At a recent “solidarity barbecue” held outside the plant, workers interviewed by The Huffington Post tried to put on a brave face. But many expressed fear about their future, even if the plant stays open.

"It would be a huge setback," said Bob Scott, a CAW plant chairman with 23 years at the plant. "I have grandchildren, and I have to say, for us to step back 20 years in wages -- for my children and grandchildren, it's not going to be much of a life."

Ross Seeley, a pipe-fitter who has worked at the plant for 29-and-a-half years, said he is “hopeful," but when asked about how he thinks the dispute will end, his easy smile faded.

“They can kind of do whatever they want to do. I think they’re probably going to close the plant and move it, which is terrible,” said Seeley, whose retirement should be just six months away but remains uncertain as the lockout stretches on. “It leaves you speechless.”

Officials at the CAW charge that Caterpillar opened the plant in Muncie in part to put pressure on the workers in London. They say that the company would lose nothing from a move, but it would leave behind a devastated community. In addition to the 465 jobs that would be lost at the plant itself, an additional 2,000 supply jobs would be lost by extension, according to estimates.

Manufacturers have long employed a strategy of building plants in locations with cheaper wages, like the union-averse southern states or in Mexico. But Indiana is part of the union-strong industrial backbone of America, and some say that the choice to locate a low-wage plant there would set a troubling precedent.

"They didn't go to Mexico, or Tennessee; they didn't need to," Kaboolian said.

In Muncie, where the official unemployment rate is around 10 percent and the unofficial rate hovers near 20, the jobs would be welcomed, even if they came with low wages and slim benefits, according to the city's mayor. Formerly an industrial center, Muncie has lost over 10,000 manufacturing jobs in the past 15 years.

"I sympathize with everything that's going on with the workers in Canada and support their struggles for inequality," said Mayor Dennis Tyler. "But the truth of the matter is that it is the corporations, at the end of the day, that are going to make the decision. And we've got over 4,000 abandoned homes here and people that need to go to work."

Rachel Mendleson contributed reporting.

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