As unions lose power, Canada gets the blue-collar blues

The Globe and Mail

Marc Lagerway worked for CP Rail as an engineer for 34 years. During the last decade of his career, he was making about $85,000 a year, about double the median pretax income of Canadian men. (CHRIS BOLIN FOR THE GLOBE AND MAIL)

This is part of The Globe's Wealth Paradox series, a two-week examination into how the income divide is shaping Canada.

Marc Lagerway is one of the lucky ones.

When he retired last year from Canadian Pacific Railway Ltd., he belonged to a group that is fast becoming an endangered species – unionized employees who spend their entire working lives with the same company, earning handsome wages and a healthy guaranteed pension.

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For most of his 34 years at CP, he was an engineer riding in the cabs of locomotives hauling freight from Calgary to Medicine Hat, Red Deer and Field, B.C., and back. During the last decade of his career, he was making about $85,000 a year, about double the median pretax income of Canadian men. “It was quite easy to go on a holiday or buy a vehicle or buy a house,” Mr. Lagerway says. “You never had a problem getting credit.”

The Canadian Pacific job brought with it other benefits – a sense of upward mobility, enough money to send his daughter to university, and now, a $6,000-a-month pension cheque. But as he settles into retirement at the age of 56, the colleagues he left behind at the railway are the focus of one of the more radical restructuring plans any major Canadian company has tried in recent years.

Hunter Harrison, a brash, hard-driving Tennessean who was credited for the turnaround at Canadian National Railway Co., was brought in last year by CP’s new board to make it more profitable. Mr. Harrison’s promise is to cut 4,500 jobs by 2016, or nearly one-quarter of the work force.

CP, some say, is merely catching up with its industry, and with the times. Long before CP’s cost-cutting push, Corporate Canada had embarked on a drive for efficiency that has helped to reshape the country’s economy – all to deal with a new environment of freer global trade and less government protection.

The move toward leaner companies has produced economic dividends. It has helped Canada retain its position as one of the world’s most competitive economies, ranking 14th in the World Economic Forum competitiveness index. In some cases, including CP’s, it has created tremendous gains for investors.

But the benefits of greater efficiency have not been evenly distributed. In manufacturing, forestry, mining, transportation and other sectors, globalization and increased efficiency led to the elimination of hundreds of thousands of high-paying unionized positions in Canada.

That drop in unionized jobs – and the resulting loss of blue-collar bargaining power – appears to be a major reason for the disquieting increase in inequality in Canada. About 18 per cent of private sector jobs are now unionized, compared to 21 per cent in 1997, and the proportion was declining even before then.

Anemic economic growth and pressure on wages and benefits have combined to deal a severe blow to a concept long cherished by Canadians – that the next generation will be better off than the one that preceded it.

“It just took that final knockout punch of the Great Recession to tilt everything away from easy progression up the socio-economic ladder for new labour market entrants or for someone who had lost a job in a displaced industry,” says Rafael Gomez, an associate professor of employment relations at the University of Toronto.

“The relative decline in private sector unionization is the biggest institutional factor behind the rise in inequality.”

The drop in unionized jobs ripples throughout the economy – in part because when enough workers are members of unions, their wage and benefit levels set standards that non-unionized companies usually have to meet. Prof. Gomez points to the auto sector in Ontario, where non-union Honda of Canada Mfg. and Toyota Motor Manufacturing Canada Inc. effectively match what the Canadian units of the Detroit Three auto makers pay their unionized workers.

Higher-wage unionized jobs have traditionally been a ticket to the middle class – especially for those without university degrees, such as Mr. Lagerway – and all the spending on consumer and other goods and services such a lifestyle entails. But the path to those jobs has been getting more difficult.

By 2010, median pretax family incomes stood at $57,000 – modestly higher than in 2000, but at the same level as 1980, after adjusting for inflation. Median wages for men barely budged between 2000 and 2010 at about $42,000.

A portrait of CP’s recent history provides a glimpse into how workers were affected by the quest for greater efficiency.

The company cut 3,000 unionized jobs between 2000 and 2010 as it tried to improve a key measure of railway efficiency, its operating ratio. That number, which represents the ratio of operating expenses to revenues, fluctuated throughout the decade with its best performance in 2007 at 75.3 per cent. (Despite those cuts, it still lagged behind industry rivals.)

For some workers, it adds salt to the wound that executive compensation at CP and elsewhere grew dramatically during the 2000s. Salaries and bonuses for the five highest-paid CP executives doubled, tripled or quadrupled between 2000 and 2010, depending on the position. Mr. Harrison’s signing bonus last year included a large stock option grant valued at $10-million.

But it’s too simple to say that the bosses won and the workers lost. There was substantial turnover in the company’s executive suite during the decade and wages generally rose for unionized employees who hung on to their jobs.

Disappearing unionized jobs

Mr. Lagerway landed his job at the railway the old-fashioned way. He was Alberta-bound on a train out of Winnipeg in the late 1970s, looking for a job in the booming oil patch, when a CP employee on the same train told him the railway was hiring brakemen. That was a job he was qualified to do after working summers at Canadian National Railway in Manitoba.

CP Rail in those days was a division of Canadian Pacific Ltd., a transportation giant that dabbled in telecommunications and held a large portfolio of investments that served as a kind of proxy for the Canadian economy – forest products, mining, oil and gas, the steel industry and hotels.

By 2000, Mr. Lagerway, represented by the Teamsters Union, was spending his days driving locomotives for CP out of Calgary, taking trains as much as a mile long to Field, B.C., through the Kicking Horse Pass and the engineering marvel of the spiral tunnels.

“Beautiful country. That was one of the allures,” he recalls. “You’re on a big, heavy, powerful piece of machinery. It’s exhilarating.”

At that point, he was one of 18,000 workers at a $3.65-billion a year company. In his message to shareholders in 2000, the railway’s CEO, Robert Ritchie, boasted that his employees were “a hardy bunch, and rally to any kind of challenge.” And a new challenge was on the horizon: The railway was preparing to go it alone after the CP conglomerate broke into five separate companies to unlock shareholder value.

The Canadian economy was relatively healthy at the time. The auto industry was riding high at its peak employment level. The dollar was low, making exports to the booming U.S. economy very competitive.

Altogether, people working in manufacturing, forestry, mining, and transportation and warehousing jobs – traditionally heavily unionized sectors – represented almost one-third of all private sector employees in the country. These workers were among the luckier members of the work force, with average wages of $19.46 an hour, compared with $15.33 for non-unionized employees.

But soon enough, an economic downturn, globalization and a surge in the dollar would begin to pummel manufacturing and other sectors.

Some of the biggest companies in the country were eliminating jobs by the thousands. Air Canada slashed 9,000 jobs in 2001. CN, CP’s chief competitor in the railway business, had trimmed 3,000 jobs in 1998 after it was privatized. Bombardier Inc. cut 3,800 in 2001.

As CP began to restructure, it didn’t wield as sharp an axe as rival CN, a failure that would later come home to roost. But the commodities boom nevertheless allowed CP to roll to a record profit in 2007, and it stayed profitable even in the deep recession of 2008 and 2009.

Mr. Lagerway’s engineering job allowed him to improve his lifestyle. He moved out of northwest Calgary to a two-acre property in the Georgian Estates area northeast of the city in 2004. His salary enabled him to finance his daughter’s education at Flinders University in Australia, where she went to nursing school.

By the end of the decade, crane operators and other unionized employees at CP were winning raises of 3 per cent that took their annual salaries to $55,744. Those increases were on par with unionized wages across the country. The average annual wage for unionized employees nationally reached $54,163 in 2010, compared with $43,513 for non-unionized workers.

But while wages were holding up, the number of those jobs available was shrinking. The downsizing of manufacturing and other highly unionized sectors would have profound and lingering effects on the labour force. Auto makers and auto parts companies shed about 50,000 jobs. Unionized workers at the Canadian units of the Detroit Three auto makers surrendered weeks of holidays, indexed pensions and company-paid health care benefits at retirement.

While there were 1.3 million more private sector jobs in 2010 than there were in 2000, there were fewer unionized jobs in steel making, the auto sector and even forestry and mining. Almost 500,000 manufacturing jobs vanished in the decade. More than half of those – 289,000 – were unionized.

In the executive suite, wages were moving up. Fred Green, CP’s CEO, earned direct compensation that totalled $5.2-million in 2010, almost four times what his predecessor, Mr. Ritchie, was paid in 2000. The increase was part of a broader trend in executive pay that took the median CEO salary at Canada’s 100 largest companies to $3.3-million in 2010 from $1.4-million in 2000.

The growing income gap between those at the very top and those in the shrinking middle is the result of many factors – not only the decline in workers’ bargaining power but changing practices in executive compensation and a shifting market for certain skills.

As kind as the job market has been to someone like Mr. Lagerway, it has been equally unkind to Mike Thompson, a unionized employee who was planning on working for the same company his entire working life, following in the footsteps of his father at the Ford Motor Co. assembly plant in St. Thomas, Ont., just south of London.

But makers from Japan, South Korea and Europe eviscerated Ford’s market share in the 2000s and led to the closing of the St. Thomas factory and several other North American Ford plants.

Mr. Thompson, now 43, went to work building Crown Victoria, Mercury Topaz and Grand Marquis sedans at the St. Thomas factory right after graduating from high school in 1989. When the plant closed in 2011, he was earning $32 an hour relieving other workers on the assembly line and stocking the line with parts.

“My dad worked there and my relatives worked there,” he recalls. “I had uncles, cousins; I think there was maybe about 10 of us.”

Since the plant closed, he has taken training courses and had a trial at one employer that didn’t work out “because my computer skills were horrible.”

He has found the adjustment more difficult than he expected, both mentally and financially. “A man’s supposed to work,” he says.

He looks at jobs offering $12 or $13 an hour, but says they pay less than what he has been receiving on employment insurance and are not enough to support a family. “I would love to be working at a job making $22 an hour. I think that’s a reasonable request for a family man.”

He figures his best hope is to get recalled by Ford to work at its assembly plant in Oakville, Ont., when it expands next year.

A study of laid-off workers done by McMaster University and the Canadian Auto Workers union last year on workers laid off at a Chrysler plant and two auto parts factories found that more than half the people were out of work for a year or longer.

Most of the Chrysler workers went back to the auto maker when it reinstated a third shift at the plant. A majority of workers at the two plants found new jobs.

“However, many are working in more precarious forms of employment and most are earning lower wages and incomes, with fewer or no benefits,” the study found.

Back at CP, there is a large list of employees also on layoff, and hoping for a recall some day.

Despite a long string of profitable years, the railway was less efficient than its rival CN. From 2001 to 2011 – CP’s first decade as an independent company after the breakup of the old Canadian Pacific conglomerate – CP generated annual shareholder returns of about 7 per cent, versus 13 per cent for CN.

That left the railway vulnerable to an assault by New York-based hedge fund Pershing Square Capital Management LP and its founder Bill Ackman, who launched a proxy battle that led to the removal of Fred Green as CEO, along with several directors.

Mr. Ackman brought in Mr. Harrison, who had spearheaded CN’s industry-leading performance.

The result has been a unrelenting drive to reduce CP Rail’s operating ratio that has led to job cuts across the board, from vice-presidents to consultants and contract employees to engineers and yard workers. Running longer trains and running them faster has cut a full day out of intermodal travel between Vancouver and Toronto. More than 450 locomotives have been idled.

Jobs are being cut mainly by attrition and among contract workers, but also include management positions, CP Rail spokesman Ed Greenberg said.

“CP’s management compensation structure is performance-based,” he adds. “If customers and shareholders are rewarded, so is management.” (CP Rail’s once-lagging stock price has more than doubled since late 2011.)

The company’s union contracts are among the best in the industry, he noted, with wage increases above the rate of inflation and industry-leading pensions.

The question is how many will be able to take advantage of those working conditions in the future. There are more job cuts to come, reducing opportunities for a new generation to move into the kind of jobs that Mr. Lagerway enjoyed.

The moves should further improve the railway’s operating ratio, which represents 50 per cent of the corporate performance objectives that govern how Mr. Harrison and other senior executives are paid.

Mr. Lagerway, however, doesn’t see the improved efficiency at his former workplace as a bad thing.

“There was a lot of room to fix things,” he notes. “I never felt at any point in my career that I was short-changed or jilted out of fair income.”

With files from reporters Tavia Grant and Janet McFarland

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Canadian Pacific Railway
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