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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris.

Contract talks between the Big Three automakers and the UAW are set to begin next month and they're expected to be especially contentious. GM, Ford and Chrysler have piled up enormous losses in recent years and are expected to demand big concessions. The union will be looking to protect both its current workers and retirees from taking any big hits.

BLOCK: The heavy construction equipment-maker Caterpillar faced a similar situation with the UAW a decade ago. There were several strikes, but the company emerged with a labor agreement that has allowed it to grow and prosper.

NPR's Jack Speer reports.

JACK SPEER: If you want to see the future of the U.S. auto industry, it might just be inside this bustling plant in Peoria, Illinois. Home to heavy equipment-maker Caterpillar, it's where they make the bright yellow bulldozers that are used all over the world. Like Detroit, Caterpillar has assembly lines and thousands of employees represented by the United Auto Workers. Dextex Mosher(ph) has been with Caterpillar for 42 years. He says he remembers the old days at the company.

Mr. DEXTER MOSHER (Employee, Caterpillar Inc.): Before, you know, it used to be work to rule, that's down the road, we don't do that anymore. Now, you're given a job, a duty, and you go out and do that job.

SPEER: But if working to the rule is passé at Caterpillar these days, getting hired here is also less lucrative than it once was. After a bitter battle with the UAW during the 1990s and several strikes, Caterpillar emerged with a two-tier wage agreement, rather than the $40 an hour starting workers used to get, it's closer to $22 an hour. Sitting in his office with a view of the Illinois River, Caterpillar CEO Jim Owens says it was a difficult time for the company. But, he says, the old system wasn't working.

Mr. JIM OWENS (CEO, Caterpillar Inc.): We were vilified by the United Auto Workers because we wanted to break with the auto pattern. And we worked hard to help our employees understand that staying with the auto pattern meant radically downsizing our presence in the world, and certainly our ability to export product from the United States, or even compete from the United States.

SPEER: In the case of Caterpillar, the UAW agreed to a six-year deal. Along with the lower wages, it also requires workers to pick up some of their own health care costs. Owens has been with the company for 34 years, the past four as CEO. He says Detroit now faces many of the same labor challenges Caterpillar faced a decade ago.

Mr. OWENS: The United Auto Workers has forced them to benchmark against each other in terms of their total labor cost. Their wages are, in many cases, 2x, twice as much, in other words, as the national level for similar work in terms of total costs per hour.

SPEER: When benefits are taken into account, the average Big Three autoworker makes around $70 an hour. A Toyota worker doing the same jobs in a U.S. plant gets $40 to $45 an hour. Retiree benefits are a big issue. But speaking on Capitol Hill this month, UAW President Ron Gettelfinger said the union will not turn its back on its retirees.

Mr. RON GETTELFINGER (President, United Auto Workers): The UAW believes it would be immoral and irresponsible to abandon the hundreds of thousands of retirees who helped build General Motors, Ford and Chrysler. We simply cannot do that.

SPEER: But with the union losing jobs, it no longer wields the clout it once did. In just the past 12 months, UAW membership has declined by 70,000 due to buyouts and attrition at Detroit's Big Three. And though the agreement reached with Caterpillar might seem like a huge negative for the UAW, there could be benefits.

The year after the two-tier wage agreement went into effect at Caterpillar, the company added more than 4,000 U.S. jobs. True, they paid less in the old jobs, but it has helped to boost union ranks. Over the past several years, employment at Caterpillar is up 25 percent to around 95,000 people. Caterpillar's CEO, Jim Owens, says, without the two-tier wage system, his company would have had to move more of its operations overseas.

Mr. OWENS: We were on a path to be not competitive in the world market had we not changed. We will pay good, at, or above market compensation, to employees at every level throughout the company. But we can't pay substantially greater than the market will bear. It just doesn't work.

SPEER: No one expects the UAW to accept a two-tier wage structure in the upcoming negotiations. And it's not possible to get the cost reductions the automakers are looking for just by cutting benefits. Today, the UAW accused the domestic automakers of posturing when they say need to reduce their labor cost by $30 an hour.

Jack Speer, NPR News.

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