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Anna Wittich, left, with sign, and Magdalena Schoenmakers, seated, join locked-out Electro-Motive workers on the picket line Friday in London, Ont. The Caterpillar plant's unionized workers were locked out of the factory Jan. 1, 2012.

The boss of the world's largest maker of construction and mining equipment took to the stage at a Washington event last spring and described a business philosophy that could have been ripped from the pages of a bulldozer's operating manual.

Caterpillar Inc.'s chief executive officer, Douglas Oberhelman, told an audience of mostly smaller business owners and managers, hosted by the U.S. Export-Import Bank, that he believed that to survive, he must approach his competitors like one of his machines would attack a mound of rubble.

"You really have to aim the guns out no matter where you are, whether it is government, private business or whatever institution it is – your school for that matter – and really look at your competitor and beat them because if not, they are going to beat you," Mr. Oberhelman said.

His philosophy is certainly rewarding Caterpillar shareholders. The Peoria, Ill., firm recorded record sales and profits in the third quarter – payoff from Mr. Oberhelman's push into fast-growing emerging markets. In December, Caterpillar predicted sales could grow by as much as 20 per cent this year from about $58-billion (U.S.) in 2011.

But Mr. Oberhelman isn't letting up. He is investing aggressively, hiring thousands of workers and opening or expanding plants in North Carolina, Illinois and California, as well as overseas in India, Indonesia and Russia.

One thing he is not expanding, however, is paycheques for unionized labour. Just ask the more than 450 Canadian Auto Workers union members at Caterpillar subsidiary Electro-Motive Canada in London, Ont. They refused to accept what the union says were demands to slash wages in half, along with reduced pensions and benefits.

So on Sunday, the company locked its workers out. The high-profile confrontation has galvanized Canada's long-declining labour movement, but is also seen by some as a dark sign of conflict to come at workplaces across the country.

The fight is emblematic of what is expected to be a tough year for union members in both Canada and the United States. It is expected to be the first of many such battles, as companies unnerved by the economic uncertainty in Europe, the stumbling recovery in the United States and the rise of new global competitors in China and elsewhere take a long look at what North American workers are costing them.

Canada's high dollar has also made workers here more expensive than their U.S. counterparts, never mind those in emerging markets. Persistent unemployment in both countries, plus public-sector layoffs, have also strengthened the hand of employers as contract talks get under way.

Add all that to the long decline of the labour movement in Canada and the U.S., which has seen private-sector membership slide dramatically, and you have the recipe for a disappointing year for workers hoping for some light at the end of the economic tunnel.

Bryon Mott, 28, who tests the mechanical and electrical systems on finished locomotives at the Electro-Motive plant, brought his wife and two-year-old daughter to the picket lines this week. He said the company's final offer would see his hourly wages slashed from $35 (Canadian) an hour down to $16.50.

"We've put off having more children because of this unrest," Mr. Mott said. "… This is an attack, from a profitable company, on the livelihood of working-class people."

'They are going to come tough at us'

In many ways, the tone for this year's picket-line battles is being set at the top. In the public sector, deficit-laden governments are obviously looking to civil servants for savings and major layoffs. The Conservative government in Ottawa, which showed no qualms about ordering workers at Air Canada and Canada Post back to work last year, is now in talks with unions representing 68,000 federal workers.

Tensions in Toronto between populist conservative Mayor Rob Ford and the city's combative unions have labour leaders raising the spectre of a management lockout that could paralyze the city and leave managers driving Zambonis at the city's hockey rinks. In B.C., Nova Scotia, and Ontario hundreds of thousands of health-care workers are either at the table or headed into tough bargaining.

Meanwhile, the Detroit Three auto makers are set to sit down with the CAW this year, in their first, tense talks since they were battered by the 2008 financial crisis and in the cases of General Motors and Chrysler, bailed out by taxpayers.

"I expect that they are going to come tough at us," said Ken Lewenza, national president of the CAW, who added that he feels the mutual respect between auto makers and his union, and the sacrifices workers already made in the depths of the crisis, will be positive factors in the talks.

He called the wage cuts and other proposals from Caterpillar "unprecedented" in Canadian labour history, and demanded that the federal government re-examine the sale of the plant to the U.S. company last year.

Caterpillar's move is a "terrible signal" for other unionized workers across the country, he added, but the clash is stirring unions to fight back: "The proposals at Electro-Motive have truly galvanized the labour movement."

Attempts to reach Electro-Motive for comment were unsuccessful. On its website, the company accuses the CAW of creating an "environment of uncertainty" and making "false allegations" about possible shutdown of the plant that it says are meant "to encourage violence at the London plant."

The company also says the costs of wages and benefits at the plant are "more than twice" those at its unionized factory in La Grange, Ill. Plus, it says, "antiquated work rules" have rendered the London operation inefficient. (Mr. Lewenza says the union has improved productivity at the plant.) The Caterpillar lockout, and a similar move by Rio Tinto Alcan to lock out 800 unionized workers at a smelter in Alma, Que., are clear signs that some companies, shaken by economic uncertainty and increased global competition, are expected to get more aggressive at the bargaining table.

"I think it's going to be a bad year," said Charlotte Yates, Dean of Social Sciences and a labour studies professor at McMaster University in Hamilton, Ont. "Employers are emboldened. They are demanding more, they are more aggressive, they're nasty. So the pressure is way more intense than I think we've seen it in a number of years."

She added that unions, particularly in Ontario, suffer from "internal disorganization" and that the most powerful ones – the CAW and the United Steelworkers – are smarting from steep membership declines caused by the recession.

Craig Rix, a lawyer with management-side labour law firm Hicks Morley Hamilton Stewart Storie LLP in Toronto, said employers are going to be using hard bargaining, including potential lockouts, to make gains.

Wage increases were somewhat tamed during the recession. But now, he said, in addition to cutting pension and benefits costs, employers are also looking to increase flexibility and productivity by changing work rules, such as how shifts are set up.

"I fully expect employers will be looking closely at all of the tools they've got available to them to bargain hard," said Mr. Rix, a former aide to federal Finance Minister Jim Flaherty when he was Ontario's labour minister.

Those talks will be extra difficult with unions that were asked to make sacrifices in the depths of the financial crisis, he added.

"I think many unions believe they made their big concessions in their last round of bargaining, as a hedge against better times," Mr. Rix said "And when they come the table this time round, the story isn't going to play out that way. Organized labour has a lot of unrealistic expectations that are going to have to be managed."

Why companies have the edge

Clearly, companies such as Caterpillar have the advantage in the coming showdown with labour. The biggest reason: there is little risk their employees will quit to take a job elsewhere. That's because anyone with a job today has good reason to hold on to it.

The North American labour market remains incredibly weak even though the U.S. recession ended more than two years ago.

Canadian employers added virtually no net new jobs over the final five months of 2011. The unemployment rate was 7.5 per cent in December, up from 7.3 per cent in August – and dramatically higher than the 5.9-per-cent rate recorded at the start of 2008. Over all, Canada's economy added almost 200,000 jobs in 2011, but almost all of the hiring occurred in the first half of the year, Statistics Canada reported Friday.

There is more momentum behind hiring in the U.S., but the country is climbing out of a much deeper hole. American employers created 200,000 non-farm jobs in December, and the unemployment rate dropped to 8.5 per cent, the lowest in almost three years. For all of 2011, the U.S. economy added 1.64 million workers, the best year since 1996. Yet last year's gain barely put a dent in the almost 9 million jobs that were lost during the recession.

Speaking in Iselin, N.J., New York Federal Reserve president William Dudley called unemployment "unacceptably high," suggesting the Fed remains concerned about the economy and could try further stimulus. It is "appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs," Mr. Dudley said.

Despite record profits and growing sales, Mr. Oberhelman and his peers are bracing for rough weather. The European debt crisis remains a dark cloud over the global economy, and the political paralysis that gripped Washington last year appears likely to continue as Democrats and Republicans jockey for position for November elections. China's authorities are tapping the brakes on that country's red-hot economy to keep a lid on inflation.

There's growth, but not a lot of it, so maintaining those sales will be a challenge, which is the biggest reason corporations are so reluctant to spend their money in payroll and new facilities, according to Steven Ricchiuto, chief economist at Mizuho Securities in New York. U.S. corporations held $1.24-trillion (U.S.) in cash at the end of 2010, according to Moody's Investors Service.

Executives also are bracing for more competition. The big North American, European and Japanese multinational corporations that traditionally dominate global trade are facing new challengers from countries such as China and Brazil. Mr. Oberhelman is on record saying he expects a Chinese entrant in the heavyweight class of big-machinery makers within a few years, which would put pressure on profits at Caterpillar and its current rivals, AB Volvo of Sweden and Komatsu Ltd. of Japan.

All of these factors have companies looking closely at their collective agreements for savings, over and above the gains some may have made when bargaining in the midst of the financial crisis three years ago.

It's not all doom and gloom. In some cases, manufacturing jobs are actually returning to the United States, although with some caveats. A decade ago, a company such as Caterpillar might not even bother to negotiate with its workers: It would simply pack up and go to China. But the "offshoring" trend is reversing, giving way to the relatively recent phenomenon in the U.S. of "re-shoring."

The decline in the value of the dollar is making goods priced in greenbacks cheaper in international markets. At the same time, the gap in production costs between the U.S. and Asia is narrowing. Chinese wages are rising at a pace of about 15 per cent a year, while U.S. wages are growing at an annual rate of about 2 per cent, which is less than inflation. Increased competitiveness at home is coaxing executives to open plants in the U.S. to meet domestic demand, leaving their Asian factories to meet growth in China.

"China has caused countries to get productive fast, or die," said Hal Sirkin, a Chicago-based senior partner at The Boston Consulting Group who is tracking the rebound in U.S. manufacturing. "It's just the beginning. This is a fundamental rebalancing of the economy."

At the same time, the high Canadian dollar has made what used to be a cost advantage for some Canadian workers versus their U.S. counterparts into a liability, with wages in Canadian manufacturing now outstripping those in the U.S.

Vancouver labour relations consultant David Shepherdson, author of a recent Conference Board of Canada report warning of labour strife to come, says the currency is behind much of the labour conflict.

"With the loonie at parity, much of that advantage is gone. So it puts a lot of pressure on Canadian manufacturers," Mr. Shepherdson said.

Bracing for the storm

The story of possible picket-line conflict in the coming year is not a uniform one across Canada. The resource boom in the West is continuing to push wages in Alberta and elsewhere upward, while employers wrestle not with angry workers but with acute shortages of skilled ones.

And no one is predicting a year that will see the number of hours lost to strikes or lockouts approach the bad old days of the 1970s and 1980s, when confrontational labour relations paralyzed workplaces in an era of stagflation, the puzzling mix of stagnant economic growth and runaway inflation. For the past decade, there has been only a fraction of the labour disruptions of a generation ago, and the numbers have been mostly flat from year to year.

But it could be the worst year in a while, especially in Ontario. Mr. Shepherdson said the auto talks will be a flash point, as the Detroit Three will seek to get Canadian auto workers to accept pay increases based on profits, a concept accepted by the U.S. United Auto Workers, but long resisted by the CAW. Indeed, it was behind its split from the UAW in 1984.

Other observers are more optimistic that both sides will blink, given the stakes, which remain high as the economy sputters, and find a Canadian-style compromise.

Auto industry consultant Dennis DesRosiers says he is cautiously optimistic confrontations can be avoided.

"If you look at the state of the industry, the demonstration effect of the last three years of bankruptcies and restructurings, you would think that a labour leader that cannot find middle ground would be an absolute idiot," Mr. DesRosiers said, adding that management must also remember what workers have already given up .

"The workers gave up a lot to save GM and Chrysler, and to some degree Ford," he said. "And so you'd think that now that times are improving slightly that there would be some reward for them as well."

Back on the picket line at Electro-Motive in London, however, compromise looks like a distant dream. Mr. Mott, who has worked at the company for three years after spending time at various U.S plants, said the wage cuts at his workplace and elsewhere put Canada's middle class, and the society it has created, at risk.

"These people are the ones that provide taxpayer money to governments," he said. "If we don't have these middle-class people, these programs that we all enjoy like health care and all that other stuff, libraries, we can't have them. If these corporations keep undercutting us, and moving the jobs out of the country, there's going to be nothing left."



Selected organizations, number of employees

Public Sector

Health Employers Association of B.C., 93,850

Government of Ontario, 86,640

Toronto District School Board, 35,840

Saskatchewan Association of Health Organizations, 31,920

Canada Revenue Agency, 31,620

Government of British Columbia, 29,000

Government of Newfoundland and Labrador, 25,250

Regional Health Authorities of Manitoba, 14,250

HBA Services, 13,000

Ontario Power Generation, 11,650

University of Alberta, 11,100

Peel, Ont., District School Board, 11,060

College Compensation and Appointments Council, 10,500

Government of Saskatchewan, 10,000

Government of New Brunswick, 8,000

Government of Nova Scotia, 7,700

York, Ont., Region District School Board, 7,140

Ville de Montréal, 6,860

Calgary School District No. 19, 6,520

Toronto Catholic District School Board, 6,060

Total 457,960

Private sector

Canadian Media Production Association, 28,000

General Motors of Canada, 12,080

Chrysler Canada, 8,000

Ford Motor Co. of Canada, 7,600

Real Canadian Superstore, 6,800

Brewers Retail Inc., 6,510

Food Basics franchises, 6,500

Professional Association of Canadian Theatres, 5,500

Bell Canada, 5,250

Calgary Co-operative Association Ltd., 3,200

Bombardier Aerospace, de Havilland Division, 2,600

NDT Management Association, 2,240

Hospitality Industrial Relations, 2,200

Canadian Pacific Railway, 2,050

Total 98,530

Source: HRSDC.