[PEN-L:11943] Worker Backlash

[Louis N Proyect <lnp3@xxxxxxxxxxxx>]

August 24, 1997

The Worker Backlash

By STEPHEN S. ROACH

EAST HAMPTON , N.Y. -- The just-resolved United Parcel Service strike was
a shot across the bow of the inflationless 1990's. American workers are
now beginning to challenge the very forces that have led to a spectacular
resurgence in corporate profitability and competitiveness in the United
States. They are, in effect, saying "no" to years of corporate cost
cutting that has been directed primarily at the nation's labor force.

The strike and the settlement, which was largely on the union's terms,
question the wisdom of a Federal Reserve that, by leaving monetary policy
steady, seems content to ignore the danger of renewed inflation. And the
settlement underscores the potential for a sharp decline in the ever
frothy stock and bond markets.

These concerns are certainly at odds with today's conventional wisdom.
Many believe that the United States economy has entered a new era.
According to this tale, the post-cold-war forces of globalization,
deregulation and a technology-led Information Age have combined to produce
a rare and powerful recovery, led by increased worker productivity.

In such a scenario, wage increases are largely offset by increased worker
productivity.

As a result, costs are held in check, inflation remains quiescent and
corporate profit margins widen inexorably. The financial markets enjoy the
best of all worlds: low interest rates that underpin a strong bond market
and healthy corporate earnings that nourish an ever rising stock market.

The productivity-led recovery offers ample rewards for shareholders and
workers alike. Labor can reap higher wages as its productivity increases,
while investors can reap handsome returns.

It's quite possible, however, that a very different scenario has been
responsible for the good news on inflation and corporate profits in recent
years. Call it a labor-crunch recovery -- one that flourishes only because
corporate America puts unrelenting pressure on its work force.

This is a much tougher and more pessimistic vision of the United States
economy in the 1990's. Pressured by intense global competition and
frustrated by efforts to boost productivity in information or service
industries, businesses become fixated on slashing labor costs, which
account for close to 70 percent of all corporate expenses in the United
States.

Intimidated by the ultimate threat of job security, labor initially
complies with corporate America's demands. Companies hire more temporary
and part-time workers, and full-time workers are made to stretch their
work schedules as never before. At the same time, employees begin to bear
more of the cost of their benefits, including health insurance. And then
there's the clincher: wages, adjusted for inflation, are squeezed, leading
to a near stagnation that has persisted for more than two decades.

Unlike the productivity-led recovery, the labor-crunch recovery is not
sustainable. It is a recipe for mounting tensions, in which a raw power
struggle occurs between capital and labor.

Investors are initially rewarded beyond their wildest dreams, but those
rewards could eventually be wiped out by a worker backlash.

Investors are quick to repudiate the case for worker backlash and defend
the miracles of the productivity-led recovery. And why shouldn't they? The
latter promises no end in sight to the glorious bull markets of the
1990's.

But there's one small problem with this grand vision of the brave new
world. There's not a shred of credible evidence in the macro-economy that
supports the notion of a meaningful improvement in America's productivity.

Indeed, in the Commerce Department's just-completed comprehensive revision
of the national economic accounts, the poor productivity performance of
the 1990's was left essentially unaltered. It found that the United States
experienced average annual gains of slightly less than 1 percent over the
past six years, little different from the disappointing performance of the
1980's and less than half the gains of the 1950's and 1960's.

It's at this point that productivity revivalists claim foul. They argue
that the data must simply be wrong. Even Alan Greenspan, the chairman of
the Federal Reserve, has embraced this point of view, and it seems to have
had a major impact on the Fed's recent decisions to leave monetary policy
unchanged.

But the weight of evidence is increasingly in favor of the labor-crunch
scenario. And it's not just the official statistics on productivity that
favor this argument.

There has also been a dramatic realignment of the nation's economic pie,
with a much larger slice going to capital and a smaller one going to
labor. Corporate profits surged to 9.6 percent of gross domestic product
in 1996, the highest share in 28 years, and labor compensation stood at 58
percent of gross domestic product in 1996, well below the high of 59
percent hit in the late 1980's.   W hich takes us back to the recently
settled U.P.S. strike. One strike hardly makes a trend. But there can be
no mistaking the message from the nation's most significant work stoppage
since 1983. Today, with the unemployment rate at a 24-year low, labor
unions were emboldened to take action. And with corporate profitability at
its highest in a generation, management has decided that it can afford to
give workers a raise. For U.P.S., the cost of settlement is hardly
trivial. By some estimates, it will eventually cost as much as $1 billion
a year, and that comes right out of the company's bottom line.

In the end, that's what worker backlash is all about. It speaks of a labor
force that challenges the very notion of cost cutting, which has been
central to America's economic recovery in the 1990's.

Whether future labor battles are fought over wages, part-time work,
mandatory overtime, temporary workers or pension and medical benefits, the
message will be the same: gone are the days of a docile American labor
force that once acquiesced to slash-and-burn corporate restructuring.

The potential for worker backlash raises profound questions. Can higher
inflation and thinner profit margins be far behind? Can the Federal
Reserve afford to keep interest rates low? Will the financial markets
continue to enjoy unbounded exuberance?

As the pendulum of economic power begins to swing from capital back to
labor, these are the very risks we must now begin to confront.

Stephen S. Roach is chief economist and director of global economics for
Morgan Stanley Dean Witter.

            Copyright 1997 The New York Times Company