At the heart of the recent hard-ball negotiations between Boeing and the International Association of Machinists (IAM) is a troubling paradox: A company scores record profits and demands tough concessions from its workers.
Something is clearly wrong with this picture. While earning more and paying less may fatten the bottom line next quarter, it dampens purchasing power and increases inequality — about the last thing the U.S. economy needs right now.
Consider first the good news: U.S. advanced manufacturing can be highly competitive in the global economy. Boeing, the top U.S. exporter of goods by value, delivered the largest number of commercial aircraft in the world for the second-year running in 2013, projecting over $5 billion in profits. This stellar performance reflects cutting-edge engineering as well as the skill and experience of 31,000 IAM union members in a cluster of plants near Seattle.
These results were achieved by taking the high road to globalization: high productivity combined with high wages and strong benefits. The result fueled innovation on the shop floor and expanded purchasing power in the community. Boeing achieved record profits and the entire economy benefitted.
Now the not so good news: Boeing celebrated this success by demanding tough concessions two years before the end of its current contract in 2016. The company held a trump card: it threatened to move production of the new 777X, a fuel-efficient wide -body critical to the company’s future, out of the Puget Sound area.
At stake were thousands of jobs and advanced technology.: 8,000 jobs at Boeing, 12,000 jobs at nearby suppliers, and a new plant to produce carbon-fiber wings, a technology that promises to define the industry for decades.
Given the stakes, the union had few alternatives but to come to the table. Washington state committed an eye-popping $8.7 billion in incentives through 2040 to keep this production, a record nationally, but everything hinged on a new contract with the union.
The IAM bargained hard, but was not about to lose the production of the 777X. The union secured modest wage increases over the life of the 8-year contract and other gains, but was compelled to accept two painful concessions: the elimination of traditional, defined benefit pensions in favor of a 401-(k) and a major jump in workers’ monthly contribution to health insurance.
As the prelude to the negotiations, Boeing’s stock was accelerating to near-record highs — soaring 77% last year — while the company’s CEO received $21 million in 2012. And, while demanding sacrifice from workers, the company showered investors with largesse. The timing was less than perfect. Boeing bought back $10 billion in stock and increased its dividend by 51% in the midst of the contract ratification votes.
Not surprisingly, the machinists voted down the initial agreement by a 2 to 1 margin in November. The company then received proposals overflowing with incentives from 22 states for 54 locations, many in right-to-work areas. The machinists then accepted a sweetened-version of the contract — $1 billion was added to the original offer — by a razor-thin 51-49% margin in early January.
Boeing could pay a price for playing hard-ball. “This was a very aggressive labor contract, and they got what they wanted by 51%,” commented Richard Aboulafia, VP of analysis at aerospace analysis firm Teal Group. “They also got a disgruntled workforce.”
The stakes go well beyond Boeing and the IAM. Concessions in the face of record profitability turn the history of U.S. competitive success on its head; the economy has soared when workers share in a company’s success, not when it comes at their expense.
Profits share of U.S. GDP has accelerated from under 4% in the mid-1980s to 11% in 2013, a postwar high. Labor’s slice of non-farm business income has slid from 63% in 2000 to 57% in 2013, a record low, transferring $750 billion annually from labor to capital. This reflects the slide of union membership in the private sector to 6.6% of the workforce in 2012. These developments “would gladden the heart of a 19th-century American robber baron,” John Plender wrote in the Financial Times.
To sustain prosperity we need rules-of-the-game that insure that it’s broadly shared.