A Case Study: Laying Off American Workers, Gouging Mexican Workers

In January 1991 the Green Giant unit of the British conglomerate, Grand Metropolitan PLC, laid off 375 workers at its processing plant in Watsonville, California: The jobs resurfaced in Mexico at a place called Irapuato. The displaced workers were earning about $7.50 an hour. Their replacements receive $4 a day.

As we enter the second decade of Reaganomics and neoliberal economics, this may not startle us at all. Things work best, we are told, when firms go where and do as they please. And the Mexican workers are no doubt pleased to have the work. On the other hand, Thomas Aquinas said, “business and finance have the duty to be faithful trustees of the resources at their disposal. No one can ever own capital resources absolutely or control their use without regard for others and society as a whole.”

Discharging the Watsonville workers was a serious matter. The U.S. Catholic bishops have recently said that, “unemployment takes a terrible toll on the health and stability of both individuals and families. It gives rise to family quarrels, greater consumption of alcohol, child abuse, spouse abuse, divorce, and higher rates of infant mortality…. Very few people survive long periods of unemployment without some psychological damage even if they have sufficient funds to meet their needs. At the extreme, the strains of job loss may drive individuals to suicide. In addition to the terrible waste of individual talent and creativity, unemployment also harms society at large….” Pope John XXIII probably had these consequences, along with the dignity of man, in mind when he declared that people have a right to employment.

When the wage rates indicated above are adjusted for overhead, we can estimate that Grand Met is saving about $7.5 million a year from the move. But Pope John Paul II said that the rights of workers take priority over the maximization of profits. The bishops added that wages paid to workers are but one of the factors affecting the competitiveness of industries, and that it is unfair to expect workers to make sacrifices if managers and shareholders do not do the same.

Was the move justified in view of all this? This article will attempt to evaluate that. Perhaps there are extenuating circumstances. The company may be in desperate financial straits. The employees may have ready access to other work. We will look at these possibilities and others too.

Is Grand Met “on the ropes”? It’s the eighth largest food-products producer in the world. Its subsidiaries and brands include J&B Scotch, Absolut Vodka, Poppin’ Fresh Dough, the Burger King restaurant chain, Haagen-Dazs ice cream, and many others. In late September The Wall Street Journal reported that the company was widely believed to be in the market for other food-industry firms to acquire.

Branded fresh produce is a $50 billion industry with high growth rates, appealing products in step with consumer trends, and only a handful of established brand names. Despite the opportunities, national and regional marketers have only begun to explore this area. Grand Met’s Green Giant division is one of these marketers. More information is presented below concerning its specific financial condition, but, no, it doesn’t appear to be struggling.

And the workers? Were they well positioned to move on to jobs in electronics or plastics or steel? They were relatively low-paid by U.S. standards (although on average they spent their last 14 years with the company and were established in their community). Most were women. The manager of the Watsonville Employment Development Department told a local newspaper, “I don’t know right now where they are going to find work. Probably nowhere.” The economy there was already devastated by a freeze and a severe earthquake.

Another way to examine the justification for what took place is to determine if reasonable sacrifices were made by other stakeholders before the Watsonville employees were released. We can only resort to Grand Met’s published financial information to speculate in this regard. Since national and corporate accounting practices in the United Kingdom and the United States are not designed for these purposes, this is not an easy task, but we will get from this what we can.

The last audited financial statements for Grand Met prior to the layoff are for the fiscal year ended September 30, 1990. Those documents report that the company had net income for the period of 1.1 billion British pounds (about $1.8 billion). This tells us that if the shareholders alone were saddled with the additional costs of continuing to use U.S. workers, the impact on net income would have been 0.417 percent, ignoring likely income tax effects which would lower this by as much as 30 or 40 percent. The financial statements indicate that each share of Grand Met stack earned 1.08 pounds ($1.85) in fiscal 1990. Absorbing the extra cost of the Watsonville workers would have reduced this to $1.8423.

The report further indicates that, on the average, Grand Met employed 138,149 persons in 1990. It does not indicate the total amount of their earnings, or the portion of those who are in management. But, as the company’s operations are primarily in the high-wage areas of the U.S., Japan, Canada, and Europe, it might be reasonable to assume that average annual earnings per employee — including managers and all — are at least $20,000. This would extend out to total annual salaries and wages of some $2.8 billion. This amount is not inconsistent with reported total costs and expenses of approximately $14 billion. In any event, a decrease in these salaries and wages of 0.27 percent would have covered the increased costs of keeping Watsonville. If the decrease were shared equally by all the employees, it would amount to $1.04 per week each. If the decrease were borne ratably based on salary, the contribution required from the lowest paid persons would obviously be much less than this. (Grand Met has no reputation for being parsimonious with its managers. After it acquired Pillsbury in 1989, Ian Martin, the chairman of the food sector, was sent to Minneapolis to run things. His first management problem was that his stretch limousine was too big to fit in the company garage.)

We can experiment with other combinations of relatively minor sacrifice that would lessen major individual sacrifices even more and achieve the desired result. For example, the additional costs might have simply been passed along to customers as either the sole solution to the problem or as the solution in combination with one or more of the other possibilities. The 1990 income statement reported net sales of 9.4 billion pounds ($16.3 billion). An overall increase in prices of 0.046 percent would yield an amount equal to the Mexican savings. It may be difficult to associate this with anything concrete, but, for example, if the Haagen-Dazs unit had been selling ice cream cones for $2, it would now need to charge $2.00092. Or, perhaps its need to get an additional .92 cents for every 1,000 cones is easier to envision.

Do not the people of Watsonville, of California, and of the U.S. have some stake in the effects of the layoffs? Consideration of this could have led to various combinations of minor sacrifice that would have kept Americans working.

While the Watsonville jobs could have been saved by some minimal sacrifices by one or more other stakeholders, it’s obvious that if they had been, the workers in Irapuato would not have this work. Are they not entitled to it by their willingness to do it more cheaply?

A distinction is appropriate here between their being entitled to it, on the one hand, and stuck with it, on the other. Pope John Paul II has written that,

the way power is distributed in a free market economy frequently gives employers greater bargaining power than employees in the negotiation of labor contracts. Such unequal power may press workers into a choice between an inadequate wage and no wage at all. But justice, not charity, demands certain minimum guarantees. The provision of wages and other benefits sufficient to support a family in dignity is a basic necessity to prevent the exploitation of workers.

On the other hand, there are real differences in the costs (as distinguished from the standards) of living in Watsonville and Irapuato, and the company should be able to take advantage of these differences if doing so victimizes no one. Should a company be criticized, for example, for paying its accountants in New York $50,000 a year and its accountants of equal abilities and responsibilities in Houston $40,000 a year, where, because of differences in the cost of living, they enjoy the same standard of living? The standard of living provided is a more significant measure of justice in pay than the amount.

Linking U.S. pay to Mexican pay in terms of standard of living is another thing that’s not easy to do. The workers in Watsonville were paid $7.50 an hour and the workers in Mexico $4 a day. The $7.50 an hour can be converted fairly readily to something meaningful because the U.S. Census Bureau has, since the early 1960s, published a statistic which has come to be recognized as an official poverty level. While this is a sliding scale of income thresholds that varies by family size, the threshold for a family of four at the time of the layoffs was $12,675 a year. Assuming fifty-two 40-hour weeks, the $7.50 an hour amounts to $15,600 a year, or 123 percent of an official minimum required to meet bare necessities.

The material we have to work with in Mexico is less official. However, in late 1989 the Confederation of Mexican Workers, the Mexican Labor Congress, and some private economists there pooled information obtained from surveys and found that the minimum salary at that time — averaging 9,160 pesos daily — barely covered 15 percent of a worker’s necessities, which could be satisfied only with a daily wage of some 61,000 pesos. The Mexican Consumer Price Index went up 30 percent in 1990 so that an amount comparable to the 61,000 pesos by early 1991 was in the range of 79,000 pesos. Converting this to dollars at the current rate of about 3,000 yields a minimum acceptable wage of some $26 per day.

If the U.S. annual poverty level wage of $12,675 is divided by 260 annual working days, we obtain a U.S. daily poverty level wage of $48.75. This, of course, suggests that the cost of living at the bottom of the economic heap in Mexico is some 53 percent of what it is in the U.S. Statistics published by Business International GRE of Geneva in May 1990 add some support to these calculations, or at least make them appear conservative. This organization has calculated relative basic food costs for several world cities. Basic food costs in Mexico City are reported as 68 percent, 72 percent, and 72 percent of those in New York, Washington, and Los Angeles, respectively.

We determined above that the workers in Watsonville received 123 percent of a minimum acceptable wage. If the Mexican workers were as well paid, they should receive $32.39 (123 percent of $26) instead of $4. Grand Met could have paid the Mexican workers $32.39 a day and not increased the overall level of misery in the world. They chose instead to gouge the Mexican workers and pocket the difference — because they have the power to do so.

It’s not too late to remedy this. Adjustments in prices, the salaries of management and other employees, and profits — smaller adjustments even than those described above — could bring the Mexican workers up to the standard of living of the displaced Americans. And, if this were done, benefits would flow back to the company. There would be the satisfaction of behaving justly toward its employees. Moreover, a work force earning enough to acquire adequate food, shelter, and health care would surely be more productive and better able to focus on the firm’s objectives.

Finally, is there any penalty that can be imposed on firms that behave as Grand Met has in this case? Apparently not in the law, but the dismissed workers have proposed a boycott. Working again with the published financial information, we can estimate how much of a boycott would be required to offset the ill-gotten gains. If we assume Grand Met’s variable costs at the margin are 50 percent of sales, those sales must be forced down by about $15 million. To do this, one percent of Americans each year will have to forego three of those $2 ice cream cones they were otherwise going to eat.