Missile assembler Thomas Tanzillo dipped into retirement savings and worked a temporary job to support his family during a 70-day strike at Raytheon Co.'s Tucson, Ariz., plant. He may need years to recover.

His union on Jan. 14 accepted a three-year contract almost identical to the one that sparked the strike: 3 percent annual raises and higher healthcare premiums. The deal came after Raytheon posted eight straight quarters of profit growth and awarded missile unit President Louise Francesconi a 19 percent raise to $1.7 million — including restricted stock — in 2005.

The Tucson settlement shows how workers are struggling to keep pace with growing U.S. economic wealth. Company profits as a percentage of gross domestic product are at a 40-year high, rising to 12 percent in the third quarter from 7 percent five years ago. Wages and salaries fell to 45 percent from 49 percent, government data show. Workers like Tanzillo are bitter.

"We don't mind making concessions if the company goes through a few lean years, but now that we're back to the boom years, they're not sharing," Tanzillo, 56, says.

Raytheon spokesman Jon Kasle says the 1,868 hourly workers at the plant consistently received higher wage increases than average hourly workers nationwide.

"We're pleased that the contract was ratified and the strike was resolved," he says. "We're going to welcome the team back to work."

'BATTLES TO COME'

Of the 1,400 active members of International Association of Machinists Local 933, 90 percent initially backed the strike against Raytheon, and an additional 100 nonunion hourly workers honored the picket line, says union representative Bobby Martinez. By the time the union ratified the contract, 43 percent of the hourly workers had returned to the job.

"They voted what they thought was the best for them," Martinez, 43, says.

He says the strike was part of a larger cause.

"This is one of the many battles to come in the war on the middle class," Martinez says. "Companies like Raytheon are focusing on making money at any cost, instead of looking at the common good of a community."

Almost three-quarters of Americans believe the growing gap between the rich and the poor is a serious concern, according to a Bloomberg/Los Angeles Times poll in December.

The GDP gap is widening even though wage gains began to pick up late last year. It wasn't until September that average hourly wages surpassed the year-end 2001 rate, adjusted for inflation, according to U.S. Labor Department data.

Average hourly earnings rose 1.7 percent in 2006 on an inflation-adjusted basis, the department says.

GAME OF CATCH-UP

U.S. workers are only beginning to recover lost ground. After inflation, median family income of $56,643 hasn't grown since 2001, says economist Jared Bernstein of the Washington- based Economic Policy Institute, which is funded by foundations, companies and labor unions.

"The typical family could end this recovery behind where they started," Bernstein says. "That's a hell of an indictment given how much income we've created."

The U.S. economy is expanding steadily, with GDP forecast to rise 2.5 percent this year, according to a January Bloomberg News survey of economists. Yet that wealth hasn't translated into greater prosperity for many Americans.

Companies such as Waltham, Mass.-based Raytheon, drugmaker Eli Lilly & Co., Goodyear Tire & Rubber Co. and United Parcel Service Inc. have ratcheted up profits while containing wages and benefits like hawks since the recovery began in late 2001.

Unlike earlier expansions, more profit is going to shareholders in the form of stock buybacks than is being earmarked for capital expenditures and wage growth.

SHAREHOLDERS' REWARD

Standard & Poor's 500 Index companies spent a record $431 billion in stock buybacks in the 12 months through Sept. 30, compared with $426 billion on capital expenditures, says S&P senior index analyst Howard Silverblatt.

Since the third quarter of 2001, S&P 500 companies have more than tripled their rate of quarterly stock buybacks to $109.8 billion — with fourth-quarter 2006 buybacks expected to come in at $112 billion, the second-highest ever. Over the same period, companies have raised their quarterly dividends 69 percent to $54.8 billion.

That trend bothers some workers and labor economists, who say the economy's gains aren't being shared equitably. They also express concern that domestic investment in new plants and equipment may be inadequate to protect jobs and incomes.

"We're not economists, but it's not too hard to figure it out," Tanzillo says. "We're living it."

In the early stages of an economic recovery, profits typically go up and wages down as a percentage of GDP. Wages gain ground later. This expansion is unusual for how long profits have gained share while paychecks have lost.

4 YEARS OF PROFIT GAINS

S&P 500 companies have reported four consecutive years of profit gains, with operating earnings rising 13 percent in 2005, 24 percent in 2004, and 19 percent in 2003 and 2002, Silverblatt says.

S&P estimates that operating profits rose 15 percent last year and will come in about 10 percent higher this year.

U.S. managers, taking advantage of new technologies and emerging economies, can better connect low-cost sources of production with buyers in affluent markets. The wage competition — which Morgan Stanley chief economist Stephen Roach calls global labor arbitrage — keeps many U.S. workers' pay in check, stretches their hours and shifts more benefits costs from companies to employees.

"The advent of the Asian workforce has maybe changed labor economics in the long term," United Technologies Corp. Chief Executive Officer George David says.

"The only way to deal with low-wage pressure from emerging markets is to have a higher-educated population doing higher-educated work at higher rates. Don't hang on to the bad work."

WILL GROWTH LAST?

Economists fall into two camps on whether the U.S. economy can continue to prosper with employers faring so much better than workers. Some, like Bernstein, say that unless wage gains lift worker pay above the rate of inflation in 2007, consumer spending may become too weak to drive growth.

Others view rising profits and stock valuations as a solid foundation for more growth. James Swanson, chief strategist at MFS Investment Management in Boston, says executives are looking for new investment opportunities to expand and to add jobs.

"We think this link to profits is an augur of stronger economic growth, not a slowdown to recession," Swanson says.

Labor analyst James Sherk, with the Heritage Foundation in Washington, rejects the notion that employers are benefiting at their employees' expense.

"The average unemployment rate of 4.6 percent last year was the lowest we've had since the 1960s with the exception of the tech bubble," Sherk says.

LILLY DEAL

Nariman Behravesh, chief economist at Lexington, Mass.-based Global Insight Inc., takes a broader view.

"What you don't want to do is hamstring a company from doing what it needs to do to stay competitive," he says. "Companies are not social welfare organizations."

Still, profits continue to rise faster than the overall GDP growth rate, as companies find new ways to add to their margins.

Eli Lilly plans to buy Bothell, Wash.-based Icos Corp. for $2.3 billion to gain rights to the Cialis impotence drug, which Icos says it expects to top $1 billion in sales this year.

Simultaneously, Indianapolis-based Lilly plans to fire all 700 Icos employees. That means Lilly can boost sales and profit without adding to its labor costs.

Former Icos scientist Pat Gray says he was stunned by the firings of his ex-colleagues.

"Lilly probably didn't think a whole lot about the people there, and, because this is a business, I guess there's no reason for them to when it comes to the bottom line," he says.

GOODYEAR GAINS

Goodyear, the largest North American tiremaker, has returned to profitability after piling up losses in 2002 and 2003. It is closing plants, cutting payroll and reducing its retiree health benefits obligations in a three-year contract that U.S. factory workers ratified in December.

The Akron, Ohio-based company says the new contract will save $610 million through 2009. The company will realize $90 million in payroll savings by the contract's third year by hiring new factory workers at $13 an hour — $3 to $4 less than for the existing workforce.

Management also won union consent to place $1.3 billion in retiree healthcare obligations into a new benefits trust, funded with $1 billion in cash and stock. The company estimates it will save at least $110 million a year starting in 2008.

It still has a $2 billion unfunded pension liability for U.S. operations.

'MATTER OF PRINCIPLE'

Tanzillo says he probably won't recoup the $9,240 in lost pay nor the $3,450 he spent on health insurance during the strike. Tanzillo says he got by on a $4,000 loan from his retirement savings and a temporary job at a catalog call center, at less than half his usual pay.

"I was determined to do whatever I needed to do," Tanzillo says. "Maybe I was foolish, but I took it as a matter of principle and I was surprised by how many other people did.

"In the future, it will be a real battle for everything we get," Tanzillo adds. "That's their job — to maximize profits and minimize their expenses — but we'd like to be seen as an asset more than as an expense."