The Globe and Mail, August 27, 1997
WHEN THE WORKERS STRIKE BACK
Stephen Roach
The recently resolved United Parcel Service strike
was a shot across the bow of the inflationless 1990s.
U.S. workers are now beginning to challenge the very
forces that have led to a spectacular resurgence in
corporate profits and competitiveness. They are, in
effect, saying "no" to years of corporate cost-cutting
directed primarily at the labour force.
The strike and the settlement, largely on the
union's terms, challenge the wisdom of a Federal
Reserve that seems content to ignore the danger of
renewed inflation. And the settlement underscores the
potential for a sharp decline in stock and bond
markets.
These concerns are at odds with today's conventional
wisdom. Many believe the U.S. economy has entered a
new era in which globalization, deregulation and the
Information Age have combined to produce a rare and
powerful recovery, led by increased worker
productivity. In this scenario, wage gains are
largely offset by the increased productivity. As a
result, costs are held in check, inflation remains
quiescent and profit margins widen inexorably. The
financial markets enjoy the best of all worlds: low
interest rates underpin a strong bond market and
health corporate earnings feed an ever-rising stock
market.
The productivity-led recovery offers ample rewards
for shareholders and workers alike. Labour 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 labour-
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 U.S. economy in the 1990s. Pressured by
intense global competition to boost productivity in
information or service industries, businesses become
fixated on slashing labour costs. Intimidated by the
threat of job security, labour initially complies with
the 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 the cost of
their benefits, including health insurance. 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 labour-
crunch recovery is not sustainable. It is a recipe
for mounting tensions, in which a raw power struggle
occurs between capital and labour. Investors are
initially rewarded beyond their wildest dreams, but
those rewards could eventually be wiped out by a
worker backlash.
Investors are quick to defend the miracles of the
productivity-led recovery that promises no end to the
bull markets of the 1990s. But there's one small
problem: there's not a shred of credible evidence in
the macro-economy that supports the notion of a
meaningful improvement in U.S. productivity. Indeed,
in the just-completed revision of the national
economic accounts, the poor productivity performance
of the 1990s was left essentially unaltered. Average
annual gains over the past six years were slightly
less than 1 per cent, little different from the
disappointing performance of the 1980s and less than
half the gains of the 1950s and 1960s.
Productivity revivalists argue that the data must be
wrong. But the weight of evidence is increasingly in
favour of the labour-crunch scenario. And it's not
just the productivity statistics that favour this
argument. There has also been a dramatic realignment
of the economic pie, with a much larger slice going to
capital and a smaller one to labour. Which takes us
back to the recently settled UPS strike.
For UPS, the cost of settlement, by some estimates,
will eventually be as much as $1 billion (U.S.) a
year. In the end, that's what worker backlash is all
about. It speaks of a labour force that challenges
the very notion of cost-cutting that has been central
to economic recovery in the 1990s.
-----
Stephen Roach is chief economist and director of
global economics for Morgan Stanley Dean Witter.
Re-printed from the New York Times.
